The S&P 500 (^GSPC 0.16%), which tracks the 500 largest public U.S. companies by market cap, is one of three major stock market indexes. It's generally viewed as the primary benchmark for the stock market -- so much so that its performance is often used interchangeably with the stock market's performance as a whole.
If you're looking for an investment that can carry a lot of the weight for your portfolio long-term, look no further than an S&P 500 exchange-traded fund (ETF).
Time reigns supreme
Time is arguably the best thing on an investor's side. Where you may lack in money to invest, you can make up for it by leaning on the power of time and compound earnings. Compound earnings occur when the money you make on your investments begins to earn money on itself, and it's one of the (if not the) best wealth creation tools in the stock market. It's great making money on your investments, but it's better when that money is making money, too.
Historically, the S&P 500 has returned around 10% annually in the long term. Past results don't guarantee future performance by any means, but if we assume that continues, here's how long it would take you to accumulate $1 million 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. Based on historical performance of S&P 500 Index, which is no guarantee of future performance.
In each scenario above, getting to $1 million was doable without personally investing anything close to that much, thanks to time and compound interest. The more time you have, the less in monthly contributions you have to make, and the less you have to contribute overall.
Or you can take advantage of both. Here's roughly how much you'd have if you invested $1,000 monthly for a different number of years, for example:
| YEARS INVESTED | VALUE |
|---|---|
| 20 | $687,000 |
| 30 | $1.97 million |
| 40 | $5.31 million |
Data source: Author calculations. Based on historical performance of S&P 500 Index, which is no guarantee of future performance.
Choosing the S&P 500 ETF for you
The S&P 500 itself is an index, but different financial institutions put together their own respective funds to mirror the index and companies within it. For example, Vanguard, BlackRock, and State Street Global Advisors each have an S&P 500 ETF: Vanguard S&P 500 ETF (VOO 0.12%), iShares Core S&P 500 ETF (IVV 0.12%), and SPDR S&P 500 ETF Trust (SPY 0.13%). Since they mirror the S&P 500, there's no real tangible difference between them besides, potentially, the expense ratio.
That said, you can't go wrong with the Vanguard S&P 500 ETF because of its low 0.03% expense ratio. And if you're wondering why you should choose an S&P 500 ETF when you could get the same results with another investment that averages those returns, it boils down to the trifecta: Diversification, blue chip stocks, and lessened risk.
Although the Vanguard S&P 500 ETF only contains large-cap companies (so it's not totally diversified), they span all 11 major sectors and include most of the respective industry leaders:
- Communication Services (7.5%)
- Consumer Discretionary (10.4%)
- Consumer Staples (7%)
- Energy (5.1%)
- Financials (11.6%)
- Health Care (15.2%)
- Industrials (8.4%)
- Information Technology (26.4%)
- Materials (2.7%)
- Real Estate (2.7%)
- Utilities (3%)
This differs from the tech-heavy Nasdaq Composite and 30-stock Dow Jones (the other two major stock market indexes). Having so much diversification can help lessen some risks and ensure your portfolio isn't too reliant on too few companies or sectors.
Expect bumps along the way
The S&P 500 has been proven to produce long-term results, but that doesn't mean it's all smooth sailing along the way. In fact, the S&P 500 has finished in the negative in almost a quarter of the years since its inception. But that's the nature of the stock market; volatility and down periods are inevitable. What's important is that you remain consistent with your investing.
Nothing in the stock market is guaranteed, and you can't reasonably predict its actions. However, you can invest using traditional investing wisdom that has historically worked and is primed to keep working over time. A large chunk of that traditional investing wisdom -- such as diversification, blue chip stocks, low cost, and such -- can be accomplished with a fund like the Vanguard S&P 500 ETF. Let it lead you to the promised land.
