As I've written before, there was a period in my life when I was really nervous about the idea of buying stocks. I hated the thought of working hard to earn money only to potentially lose it, and I also didn't know a lot about stocks at the time and was worried about picking the wrong ones.
I wish someone would've told me back then about index funds -- or, more specifically, S&P 500 index funds. Nowadays, I like to recommend S&P 500 index funds to friends who are first getting started investing, or to those who are naturally anxious about the idea of buying stocks.
Not sure what I'm talking about when I say "S&P 500 index funds?" That's OK -- here's a quick primer.
Index funds are passively managed funds whose goal is to mimic the performance of the different market indexes they're associated with. Meanwhile, the S&P 500 is a market index that's comprised of the 500 largest publicly traded companies.
With that out of the way, here's why S&P 500 index funds are a good choice if you're skittish about investing and want to ease into it. They're also a good bet for seasoned investors who are naturally risk-averse.
1. They don't require a lot of research
When you buy individual stocks, there's a lot of work involved -- or at least there should be. Specifically, before buying individual stocks, you should look at each company's financials, management team, and long-term prospects to see if it should have a place in your portfolio.
Kind of overwhelming, right?
With an S&P index fund, you really don't need to do all of that work, since you're not betting on a specific company and the products or services it sells. That can not only save you time, but also, stress.
2. They offer instant diversification
As a general rule, it's smart to maintain a fair amount of diversification within your portfolio. That means buying stocks from different market segments, as opposed to, say, loading up solely on tech stocks or energy stocks.
Having a diverse mix of stocks could mean seeing your portfolio value sink less during a market crash. It can also help you grow long-term wealth.
The great thing about S&P 500 index funds is that they lend to immediate diversification. After all, you're talking about owning a piece of 500 different companies.
3. They have a strong performance history
The S&P 500 has a long history of rewarding investors who have stuck with it for many years. And as such, S&P 500 index funds tend to have a solid performance history.
The Schwab S&P 500 Index Fund (SWPPX -0.15%), for example, has delivered a return of almost 9% since its inception in May of 1997. Meanwhile, the Vanguard 500 Index Fund Admiral Shares (VFIAX -0.15%) has delivered a return of almost 8% since its inception in November of 2000.
These are just a couple of examples, but returns in this ballpark could yield some pretty impressive results. In fact, if you were to invest $300 a month in S&P 500 index funds over 40 years and enjoy an average annual 8% return, you'd wind up with about $933,000.
A solid bet
It's natural to worry about investing, especially if you haven't been at it for all that long. And even if you have been investing for years, some people just have difficulty shaking their stock market fears. Banking on S&P 500 index funds is a good way to ease those concerns -- and come out pretty wealthy in the long run.