Many us of dream of being millionaires one day. We may also be imagining that such an achievement will require us to get in on a high-flying stock at the ground floor or that we will have to move to Silicon Valley and start a company in our garage. That's not the case, though.
Here's a look at how you might amass a million dollars -- or more! -- and in a much easier and more achievable fashion than you would have expected: via the S&P 500.
Meet the S&P 500
The S&P 500 (with the S&P standing for Standard & Poor's) is an index that debuted back in 1957. It's made up of about 500 large American companies that together represent roughly 80% of the U.S. stock market's total value. There are thousands of companies in the U.S. stock market, so that tells you just how big these businesses are. Indeed, the median market capitalization of its components was recently a hefty $31.7 billion.
Like the Dow Jones Industrial Average ("the Dow"), the S&P 500 is often used as a proxy for the entire U.S. stock market -- and in some ways, it's a better one. For example, the Dow includes only 30 companies, versus the S&P 500's 500.
The 500 stocks in the S&P 500 index are not held in equal amounts. Instead, like many indexes, they're weighted by market cap, so the largest companies influence the index much more than the smaller components. Here are the largest companies in the S&P 500 -- and their recent weightings:
Company |
Percentage of S&P 500 Value |
---|---|
Apple |
6.9% |
Microsoft |
5.7% |
Amazon.com |
3.5% |
Tesla |
2.3% |
Alphabet (combines Class A and Class C shares) |
3.8%* |
Berkshire Hathaway |
1.7% |
UnitedHealth Group |
1.4% |
Nvidia |
1.4% |
Johnson & Johnson |
1.3% |
The 100th holding in the index was recently Gilead Sciences, with a weight of 0.2%, and the 300th holding was Coterra Energy, with a weight of 0.06%. And the company at the bottom? It was recently Embecta, with a weight of 0.00005%. Clearly, the top companies are what move the needle the most. Indeed, the top 10 companies hold more than 25% of the index's value. Fortunately, most of them are companies many investors would love to own.
Index funds -- the easiest and often best investment
Most of us should be considering parking much or all of our long-term dollars in low-fee index funds. Why index funds? Well, because they outperform many other investing alternatives and they're super easy to use.
An index fund is simply a mutual fund -- or an exchange-traded fund (ETF), which is essentially a fund that trades like a stock -- that tracks a particular index, holding the same securities that are in the index and aiming to deliver the same return (less fees). So an S&P 500 index fund holds shares of the companies in the index and offers its shareholders roughly the same return as the S&P 500. (There are many S&P 500 index funds, by the way, and many other index funds tracking other indexes.)
Getting to a million -- it's all math
So how do you get to a million dollars with the S&P 500? You do so via an S&P 500 index fund, ideally one with ultralow fees. Understand that there are no guaranteed returns in the stock market, and it can be volatile. But over decades, the stock market has averaged an annual return of close to 10%.
In the period in which you invest, though, the average annual return could be a little (or a lot) higher or lower. So let's be a little conservative and see how regular investments of various amounts can grow over time at 8% annually, in the table below:
Growing at 8% for |
$10,000 invested annually |
$15,000 invested annually |
$20,000 invested annually |
---|---|---|---|
5 years |
$63,359 |
$95,039 |
$126,718 |
10 years |
$156,455 |
$234,683 |
$312,910 |
15 years |
$293,243 |
$439,865 |
$586,486 |
20 years |
$494,229 |
$741,344 |
$988,458 |
25 years |
$789,544 |
$1,184,316 |
$1,579,088 |
30 years |
$1,223,459 |
$1,835,189 |
$2,446,918 |
Per the table above, you may get very close to $1 million over 20 years if you can sock away $20,000 annually in a low-fee S&P 500 index fund. If that's a stretch, you might get there in 25 years or less by socking away $15,000 annually.
Investing in just the S&P 500 is a perfectly sensible way to grow your wealth over time, and if you can invest significant sums regularly and you have enough time ahead of you, you stand a very good chance of becoming a millionaire -- if not a multimillionaire.