Becoming a stock market millionaire isn't easy, but it is possible with the right investments.
There's no single correct way to invest, and everyone will have different strategies and preferences. But if you're looking for a low-maintenance investment that requires next to no effort on your end yet can still make you a millionaire, there's one option that could be a smart fit: the S&P 500 index fund.
This type of investment is even approved by the legendary Warren Buffett, who not only recommends it to other investors, but has it in his own portfolio, too. Here's why it's such a fantastic investment, as well as how it could potentially make you a millionaire.
What is an S&P 500 index fund?
An S&P 500 index fund is a collection of stocks bundled together into a single fund. Each fund includes the same stocks as the S&P 500 index itself, and it aims to mirror the index's performance over time.
Warren Buffett owns two S&P 500 ETFs through his holding company, Berkshire Hathaway: the Vanguard S&P 500 ETF (VOO 1.00%) and the SPDR S&P 500 ETF Trust (SPY 0.95%).
Back in 2008, Buffett also famously put his money where his mouth was by betting $1 million that an S&P 500 index fund could outperform a group of actively managed hedge funds. Over 10 years, his investment earned total returns of nearly 126%, while the five hedge funds averaged returns of just 36% in that time.
Besides achieving consistent returns over time, there are a few other advantages of the S&P 500 index fund:
- Instant diversification: By investing in a single S&P 500 index fund, you'll instantly have a stake in 500 companies across a wide variety of industries. This diversification can significantly lower your risk, especially during periods of volatility.
- Powerhouse stocks: The stocks within the S&P 500 are among the best of the best. These companies are the largest and strongest in the U.S., and while they're not immune to volatility, they have the best chances of surviving downturns.
- Consistent long-term growth: Over time, this investment is incredibly consistent. Analysts at Crestmont Research examined the S&P 500's 20-year total returns throughout the index's history, and they found that every single period ended in positive total returns. In other words, if you had invested in an S&P 500 index fund at any point and held it for 20 years, you'd have made money.
Also, this investment requires next to no effort on your part. All of the stocks are chosen for you, so you don't need to worry about researching companies, staying up-to-date on industry trends, or deciding when to buy or sell. Simply invest consistently, then let the fund do the rest of the work.
How to accumulate $1 million or more
Of course, your actual returns will depend on how the market fares over the coming years. Historically, though, the market itself has earned an average rate of return of around 10% per year, meaning the annual highs and lows have averaged out to roughly 10% per year over decades.
If you're earning a 10% average annual rate of return, here's approximately how much you'd need to invest each month to reach $1 million depending on how many years you have to save:
| Number of Years | Amount Invested per Month | Total Portfolio Value |
|---|---|---|
| 20 | $1,500 | $1.031 million |
| 25 | $900 | $1.062 million |
| 30 | $525 | $1.036 million |
| 35 | $325 | $1.057 million |
| 40 | $200 | $1.062 million |
Data source: Author's calculations via investor.gov.
The more time you have to save, the less you'll need to invest each month to reach $1 million or more. Even if you can't afford to save hundreds of dollars per month, getting started now will still help you accumulate more over time.
While there are a number of perks with this investment, there is one important downside, too: It can't earn above-average returns. S&P 500 index funds are designed to follow the market, so it's impossible for them to beat the market. If earning above-average returns is a priority for you, investing in individual stocks may be a better strategy.
S&P 500 index funds can be a fantastic tool for building wealth with less effort. While they won't be right for every portfolio, if you're looking for a simple and safer way to grow your savings over time, they could be a smart option for you.
