For some people, investing is a skill that comes naturally. But for others, the idea of putting their money to work can be downright daunting.
Let's face it -- there are hundreds upon hundreds of stocks you could choose to put your money into. And while you probably know that it's important to diversify within your portfolio, you may not feel confident choosing one company over another within a given industry.
If you're confused about investing but are committed to building a solid portfolio so you can retire securely or meet another goal, worry not. You're far from the only person out there who's nervous about hand-picking stocks. And if you fall back on this solid investment choice, you won't have to.
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Put your money into the broad market
A diverse portfolio can help you get through periods of stock market turbulence and grow a lot of wealth over time. It's important to branch out rather than put all of your eggs into a single basket, and S&P 500 index funds make that an easy thing to do.
Index funds are passively managed funds whose goal is to match the performance of the market indexes they're tied to. What makes S&P 500 index funds a particularly smart long-term investment is that they effectively allow you to put your money into 500 different companies -- most of the largest ones that trade publicly. That gives you the diversification you need to invest confidently.
You don't really need to put a lot of research into S&P 500 index funds, because you're buying into the broad market. You're not, for example, choosing to put $2,000 into a specific energy or tech company and hoping for the best.
You may be thinking: "Won't my S&P 500 index funds lose value if the stock market crashes?" And the answer is yes, that's a reasonable assumption.
But remember, over time, the S&P 500 has recovered from numerous downturns and rewarded investors who stuck with it. So while buying S&P 500 index funds won't prevent temporary or on-screen losses in your portfolio, it could set you up for solid long-term gains.
Is there a downside?
Like all investments, S&P 500 index funds aren't perfect. One drawback of putting money into them is that your portfolio won't beat the performance of the broad market -- it will only match it. But is that a bad thing? Not necessarily.
Between 1957 and the end of 2021, the S&P 500 generated an average annual return of close to 12%. And that accounts for years when the index didn't perform well.
If you invest $300 a month at a 12% return over 40 years, you'll end up with over $2.7 million. So while S&P 500 index funds may not help you beat the broad market, if you can make your peace with that sort of return, then you can feel comfortable putting your money into them. And that way, you can take the pressure off and avoid the strain of having to research companies individually.
