For some people, the most challenging thing about investing is actually starting. Not because they don't know how or don't want to but simply because they don't know where to begin. If you're feeling this way, take comfort in knowing you're not the first person, nor will you be the last one.
Investing doesn't have to be hard, nor should it be. If you're still figuring out your investing strategy and which stocks are right for you, you can still invest. No need to delay it further; use this index fund in the meantime.
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When in doubt, look toward the S&P 500
The S&P 500 is an index that tracks the largest 500 public U.S. companies by market cap. It's the most followed index and is often used to gauge how the overall stock market is performing. While the S&P 500 is an index, different financial institutions put together their own respective S&P 500 funds that mirror the index.
Since the criteria for the companies within these index funds is already set, the only thing that usually varies between them is the expense ratios. For example, the Vanguard S&P 500 ETF has an 0.03% expense ratio, but the SPDR S&P 500 ETF has an 0.0945% expense ratio. When deciding which S&P 500 index fund to go with, you can't go wrong with the Vanguard S&P 500 and its low cost.
Kill three birds with one stone
An S&P 500 index fund is a trifecta for investors: diversification, blue chip stocks, and spread-out risks. Since the S&P 500 only contains large-cap stocks (companies with a market cap of more than $10 billion), you won't get complete diversification, but it comes very close, containing companies from all 11 major sectors:
- Communication services: 8.10%
- Consumer discretionary: 11.70%
- Consumer staples: 6.90%
- Energy: 4.60%
- Financials: 10.90%
- Health care: 15.10%
- Industrials: 7.90%
- Information technology: 26.40%
- Materials: 2.50%
- Real estate: 2.80%
- Utilities: 3.10%
Within those sectors are blue-chip stocks, which are well-established household names that have stood the test of time and have proven to be great long-term investments. There are no foolproof investments, but blue-chip stocks are as close as you can get in the stock market. An S&P 500 index fund gives you exposure to virtually all blue-chip stocks with one investment.
You also lessen your risk when you invest in an index fund because the fund's performance isn't reliant on too few companies or sectors. You may not get the outsized returns that can come with individual companies, but you're also not exposed to the sudden drops that can also come with individual companies. It's often a trade-off worth making.
Performance matters
Another great thing about the S&P 500 is that it's proven to be a lucrative long-term investment. Since its inception, the S&P 500 has returned around 10% annually over the long run. Past performance doesn't guarantee future performance, but if we assume this same trend continues, here's how much someone could accumulate in the Vanguard S&P 500 ETF by investing different monthly amounts over 25 years:
| Monthly Contributions | Average Annual Returns (Including Fees) | Personal Contributions Over 25 Years | Amount After 25 Years |
|---|---|---|---|
| $500 | 9.97% | $150,000 | $587,426 |
| $1,000 | 9.97% | $300,000 | $1.17 million |
| $2,000 | 9.97% | $600,000 | $2.34 million |
Data source: Author calculations
Thanks to compound earnings -- which occurs when the returns you make on an investment begin to earn on return on itself -- you could rack up a sizable amount by remaining consistent and letting time work its magic. Many investors have arrived at millionaire land simply by investing in an S&P 500 index fund throughout their career. It's a one-stop-shop you can't go wrong with.
Starting is key
Time is one of the greatest things any investor has on their side because it can do a lot of the heavy lifting for you. There's a reason the investing saying "time in the market is more important than timing the market" has stood true. Don't delay investing because you want to wait until the "perfect" time to begin (spoiler alert: there is no perfect time).
Consistently stashing money into an S&P 500 index fund, strategy or not, beats sitting back and delaying investing any day. If you don't believe me, take the advice from Warren Buffett -- it's a strategy he swears by. He told CNBC that for people looking to build their retirement savings, a low-cost S&P 500 index fund "makes the most sense practically all of the time."
