Investing in the stock market is one of the easiest and most effective ways to build long-term wealth, but there's a common misconception that you need a lot of money to get started. While investing more per month certainly can help you earn more over time, even small amounts can still go a long way.
Investing in an S&P 500-tracking fund -- such as an S&P 500 ETF or index fund -- is a fantastic way to generate wealth while simultaneously limiting your risk. Even if you only have $25 per week, it could add up to hundreds of thousands of dollars over time.
Why invest in an S&P 500 fund?
Before you start putting your money to work, it's critical to ensure you're choosing the right investments. It can be tempting to throw your spare cash into the trendiest new stock with the hopes it will make you rich overnight, but short-term investments are often incredibly risky.
Investing in the S&P 500 through an ETF or index fund, however, is a low-risk, low-maintenance way to get involved in the stock market.
Funds such as the Vanguard S&P 500 ETF (VOO 0.82%) or the iShares Core S&P 500 ETF (IVV 0.82%) track the index itself. This means they include stocks from 500 of the largest and strongest companies in the U.S., ranging from tech behemoths like Amazon and Apple to century-old brands like Procter & Gamble and Coca-Cola.
A few of the biggest advantages of investing in an S&P 500 ETF or index fund include:
- Low-effort investing: By investing in just one S&P 500 fund, you'll instantly own a stake in hundreds of different stocks. This type of investment requires very little effort on your part, and you never need to research companies or worry about buying individual stocks.
- Thorough diversification: Because each fund includes stocks from 500 companies across a wide variety of industries, you'll achieve diversification within a single investment. This can limit your risk substantially, especially during periods of market volatility.
- A proven track record of success: The S&P 500 has managed to survive dozens of recessions, bear markets, and corrections over the last century. Because each ETF or index fund is designed to follow the index itself, it's almost guaranteed that your investment will pull through even the worst market downturns.
Not only can an S&P 500 ETF or index fund keep your money safer, but it can also help you earn a significant amount over time -- even if you can't afford to invest much per month.
How much can you earn?
Your exact earnings will depend on how the market performs over the next few decades, and nobody can say for certain what those returns will look like.
Historically, though, the S&P 500 has earned an average rate of return of around 10% per year. This means that while you likely won't earn 10% returns year after year, all of the annual ups and downs should average out to roughly 10% annually over decades.
If you were to invest just $25 per week in an S&P 500 ETF or index fund while earning a 10% average annual return, here's approximately how much you could accumulate over time:
Number of Years | Total Savings |
---|---|
20 | $69,000 |
25 | $118,000 |
30 | $197,000 |
35 | $325,000 |
40 | $531,000 |
The more time you have to save, the faster your money will grow. Also, saving even a little more per month can go a long way. If you were to invest just $30 per week instead of $25, for example, you could accumulate more than $637,000 after 40 years, all other factors remaining the same.
When to avoid S&P 500 index funds
While S&P 500 ETFs and index funds can be fantastic investments, they're not right for everyone -- and there are certain situations where you're better off avoiding them.
If you want a more hands-on approach to investing, for example, this type of investment may not be the best fit. You have no control over the individual stocks in the fund, so if there are certain companies you'd rather avoid, you don't have the ability to opt out of those specific stocks.
Also, an S&P 500 fund can only earn average returns. It's designed to follow the market, so it's impossible for it to beat the market. If earning above-average returns is a priority for you, you may be better off investing in individual stocks.
S&P 500 ETFs and index funds can be a smart option for many investors and can help you earn hundreds of thousands of dollars over time. If you're looking for a low-effort, low-risk investment, an S&P 500-tracking fund could be a great fit for your portfolio.