The U.S. stock has three major indexes: The Nasdaq Composite, Dow Jones Industrial Average (DJIA), and the S&P 500. The Nasdaq Composite is majority tech companies, consisting of almost all the companies listed on the Nasdaq stock exchange. The DJIA is very small with only 30 companies, but almost all of them are household names.
The S&P 500 tracks the 500 largest public U.S. companies by market cap, and it's used as the primary benchmark for the stock market.
When professional investors put together funds, many do so hoping to beat the returns of the S&P 500. Spoiler alert: most don't. That's because the S&P 500, in some ways, represents the stock market as a whole -- to the point where some people use it interchangeably with the "stock market's performance."
However, the S&P 500 isn't the most-followed index for no reason. It's proven to be a great long-term investment, turning many people into millionaires.
Image source: Getty Images.
Take advantage of having time
The most important thing young investors have on their side is time. Time is an investor's best friend because it increases the compounding effect. Making money on your investments is great, but when that interest begins to earn interest on itself, that's when the real magic begins. Compound earnings is one of the greatest wealth-creation phenomena, if not the best altogether. It's the reason people can become millionaires while personally investing much less than that.
The S&P 500 historically returns around 10% annually over the long run. With those returns, here's approximately how long it would take someone to cross the $1 million threshold at different monthly contributions:
| Monthly Contributions | Years Until $1 Million | Personal Contributions |
|---|---|---|
| $500 | 31 | $186,000 |
| $750 | 27 | $243,000 |
| $1,000 | 24 | $288,000 |
| $1,500 | 20 | $360,000 |
| $2,500 | 18 | $432,000 |
Data source: author calculations
Thanks to compound earnings, $1 million or more was attainable without investing even half of that amount. The more time you give yourself, the less monthly contributions you have to make, and the less you contribute overall.
To give you another picture of just how important time is, let's imagine three people invest $1,000 monthly, receiving 10% average annual returns, until age 62 (the first year of Social Security eligibility). Here's roughly how much they would have at different starting ages:
| Starting Age | Value At Age 62 |
|---|---|
| 22 | $5.31 million |
| 32 | $1.97 million |
| 42 | $687,000 |
Data source: author calculations
Two birds, one stone
The S&P 500 also gives investors the added benefit of diversification. Even though it only consists of large-cap companies, the companies within it span all 11 major sectors:
- Communication Services (8.90%)
- Consumer Discretionary (10.50%)
- Consumer Staples (7.00%)
- Energy (4.40%)
- Financials (10.80%)
- Health Care (15.20%)
- Industrials (7.80%)
- Information Technology (26.80%)
- Materials (2.60%)
- Real Estate (2.90%)
- Utilities (3.10%)
This is much different than the tech-heavy Nasdaq Composite and selective DJIA. Being able to make a single investment and instantly get exposure to more than 500 of the most established companies in the U.S. is a gift. The S&P 500's performance isn't reliant on too few companies or industries, and that's always a good thing.
There are no guarantees in investing, but the one thing you can do to reduce your risk is to be well diversified. Individual companies may not survive, but you can sleep well at night trusting in the long-term potential of the S&P 500. With consistency and time, it's a young investor's one-way ticket to millionaire status.
