Becoming a millionaire through the stock market may seem like a farfetched goal, but it's possible with the right mindset and some consistent investment. Consistency is one of the most essential parts of building long-term wealth. Contributing just $500 per month to a retirement investment fund is enough to get you to millionaire status in time. If you are already contributing that amount to a 401(k) or IRA, you may well be on your way to reaching millionaire status.
One excellent stock that can help get you to your goals is the Vanguard S&P 500 ETF (VOO 1.00%). The exchange-traded fund (ETF) provides you with the benefit of diversification, is easy to buy, and allows you to take a hands-off approach to investing. Best of all, it can potentially make you a millionaire in the long run. Here's how.
The S&P 500 index is a market barometer that many investment managers measure against
Reaching your long-term financial goals is as simple as creating a plan and sticking to that plan, regardless of what the market throws at you. One of the best things you can do is consistently put away money and allow your investments to grow on a compounded basis over time. One of the best vehicles that can get you the long-term growth you need is a fund mimicking the performance of the S&P 500 (^GSPC 1.02%).
The S&P 500 is a stock market index that tracks 500 of the top publicly traded companies in the U.S. across multiple sectors of the economy. The companies that dominate the index are those with the largest market capitalization, high volume, and high liquidity (easy to buy and sell in the open market).
Image source: Getty Images.
Many investors use the index as a barometer for the economy, and it is also a widely used benchmark to measure how well fund managers perform. What makes it appealing is that it includes many of the top companies in the U.S. and is diversified across various industries so that the combined fund can perform well during different times of the economic cycle.
S&P Dow Jones Indices, a joint venture between S&P Global, the CME Group, and News Corp, maintains the S&P 500 and rebalances the index and its components every quarter to keep up with changes in the stock market. Companies are regularly being added or removed from the index based on specific criteria, keeping it fresh with the top stocks and requiring little effort from investors to manage.
Here's how a $500 monthly investment could turn into $1 million
The stock market index, now known as the S&P 500, wasn't always 500 stocks. In 1926, Standard Statistics Company created a 90-stock index. In 1957, the benchmark index expanded to 500 companies and was renamed the S&P 500 Stock Composite Index.
Since expanding to 500 companies in 1957, the S&P 500 index has provided investors an average annualized return of 10.3%. If you invest $500 per month per month into a fund that follows the S&P 500, you stand a good chance of earning a similar return, given enough time and the continuation of this trend. Let's say the annual return is rounded off to 10%. Investing $500 monthly would compound itself and eventually earn you about $1 million in just under 29 years.
|
Years Invested |
Balance At the End of the Period |
|---|---|
|
10 |
$102,422 |
|
20 |
$379,684 |
|
30 |
$1,130,244 |
|
40 |
$3,162,040 |
Source: Investor.gov. Calculations are based on a $0 initial investment, $500 invested monthly, a 10% average rate of return, and compounding monthly.
As you can see, it takes a while to start building momentum. But in those later years, the power of compounding returns takes control, and that's when you see your investments grow substantially.
It is important to remember that past performance isn't predictive of future returns. Also, the S&P 500 isn't going to grow at a constant rate of 10% annually. There will be some down years, some exceptional years, and everything in between during that time.
However, stocks tend to always go higher over a long enough time frame. In fact, the S&P 500 (or a similar tracking index) has never had a negative return over any 20-year period going back to its start.
Why the Vanguard S&P 500 ETF is a solid choice
You can't purchase the S&P 500 index directly, but you can buy an exchange-traded fund that tracks the index closely, and that's what the Vanguard S&P 500 ETF aims to do. What makes this ETF appealing is that you can get a diversified investment without a lot of capital upfront. Plus the ETF is very liquid, meaning you can easily buy or sell shares when needed.
Another appealing thing about this ETF is the low expense ratios. Investors must absolutely consider expense ratios when buying ETFs or mutual funds. That's because ETFs with high expense ratios can reduce your investment performance significantly over time.
Since the Vanguard S&P 500 ETF merely tracks the S&P 500 index, it requires little management, and its expense ratio is a measly 0.03%. This means that for every $10,000 you invest in the ETF, you pay just $3 in fees. This is well below the average expense ratio for ETFs, which was 0.45% on average in 2019, according to Morningstar.
Consistency is the key to building wealth
Building wealth doesn't have to be complicated. It does, however, require patience and consistency. Even if you can't yet put away $500 per month, starting with $50 or $100 per month is OK. The most important thing is getting started and creating the habit of saving money.
Investing in the Vanguard S&P 500 ETF exposes you to the largest, most influential companies in the U.S. This ETF helps provide diversification, can easily be bought on most platforms, and can be an excellent place to start on your journey toward building wealth.
