Now that a new year is under way, you may be in the process of mapping out certain financial goals. Those may include ramping up your savings rate in your retirement plan and adding to your investment portfolio.
If you're not sure how to approach the latter objective, worry not. Even if you're fairly new to investing, there's one option to look at that could make you very wealthy over time. And best of all, it doesn't require a ton of research.
Rely on the power of the broad market
When it comes to investing in stocks, you have choices. You could research different companies and hand-pick individual stocks based on factors like their current share price and growth potential. Or, you could do a lot less research and simply put your money into the broad stock market. If the latter sounds like a better move for you, then this may be the year to load up on S&P 500 index funds.
If you're not familiar with index funds, they're passively managed funds whose goal is to match the performance of different benchmarks. Index funds don't employ fund managers to choose specific stocks. Because of that, they come with very low fees, since they don't have many expenses to pass along to investors.
S&P 500 index funds, as you may have guessed by now, are index funds specifically designed to match the performance of the S&P 500 itself. And since that index consists of the 500 largest publicly traded stocks, it's a good benchmark to follow.
One thing you'll often hear as an investor is that it's important to build yourself a diverse portfolio. Within the realm of stocks, that means loading up on companies across a range of market sectors. S&P 500 index funds easily allow you to do just that -- all without having to spin your wheels digging into the finances of specific companies.
How much money can you make with S&P 500 index funds?
There's no guaranteed return to expect with the S&P 500. And to be clear, the index may have its share of strong years and its share of years when it underperforms.
That said, the S&P 500 has delivered an average annual return of about 10% since its inception in 1926 through 2019. That accounts for years of solid performance and years when the index has lost value. And so if you invest $5,000 in S&P 500 index funds in 2022, and then sit back and leave that money alone for 40 years, you'll end up with a little over $226,000 if your portfolio generates an average annual 10% return during that time.
Even if the S&P 500 doesn't quite deliver on that 10% return -- say, it only gives you an average annual 7% return over the next 40 years -- you'll still be sitting on roughly $75,000 if you invest $5,000 in 2022 and do nothing more. And that's not too shabby.
Take the guesswork out of investing
Putting your money into an S&P 500 index fund won't let you beat the market. But it may give you some peace of mind knowing you've diversified your portfolio to a very reasonable extent. Plus, buying shares of an S&P 500 index is an easy way to invest. And if you're new to building a portfolio, it's an effective means of getting started.