If you're just getting started investing in the stock market, give yourself a pat on the back. Investing is one of the best ways to generate wealth and can also set you up for a more comfortable retirement.
It can also be intimidating, however, especially when you're new to the market. With countless investments to choose from, it's often challenging to decide where to put your money.
While everyone's investing strategy will be slightly different, there's one investment in my own personal portfolio that I also recommend to anyone getting started in the stock market: an S&P 500 ETF.
Image source: Getty Images.
What is an S&P 500 ETF?
An S&P 500 ETF is an investment that aims to mirror the S&P 500 index, which is widely considered to be a benchmark of the overall stock market. It contains stocks from 500 of the largest corporations in the U.S. -- including large behemoths like Amazon, Apple, Microsoft, and Tesla.
You can't invest in the actual S&P 500 itself, so an S&P 500 ETF is the next closest thing. This fund aims to replicate the index's performance over time, so your earnings should closely follow the market's long-term returns.
Advantages of investing in an S&P 500 ETF
There are several advantages of this type of investment. For one, it's likely to see consistent growth over time.
Because the stocks within the S&P 500 are from some of the strongest companies in the U.S., it's highly likely that this type of fund will perform well over time. Of course, like any investment, it's not immune to short-term volatility. Historically, though, the S&P 500 has earned positive average returns over the long run.
In addition, an S&P 500 ETF is extremely likely to recover from market crashes. Again, all investments can experience short-term downturns. But the S&P 500 has existed for many decades, and in that time, it's seen countless corrections and crashes -- and recovered from every single one. While past performance doesn't necessarily equate to future returns, it's highly likely it will recover from future downturns, as well.
A low-maintenance investment
Perhaps the biggest advantage of this type of investment is that it requires little to no effort on your part. Because an S&P 500 ETF simply follows the S&P 500 index, you never need to worry about choosing individual stocks. You also don't need to worry about diversifying your portfolio because this one fund includes hundreds of different stocks from a variety of industries, which limits your risk.
All you have to do, then, is invest as much as you can afford each month, then sit back and wait for your money to grow. Despite being low-maintenance, though, this ETF also packs a punch.
Say, for example, you're investing $300 per month in an S&P 500 ETF and earning a 10% average annual return (this is approximately the average rate of return the S&P 500 has seen since its inception).
- Within 20 years, you'd accumulate around $206,000
- After 30 years, you'd have around $592,000
- In 40 years, you'd have roughly $1.6 million
Investing in the stock market is a fantastic way to build wealth, but choosing the right investment is critical. If you're just getting started, the S&P 500 ETF can be a smart option to limit your risk while maximizing your earnings over time.
