Got $1,000 to Invest in Stocks? Put It in This Index Fund.

So you've got $1,000 to invest. (Or maybe you have just $200. Or $50,000.) A fine place to park that moola, if you want it to grow significantly over many years, is the stock market. Check out these average annual returns, from Wharton Business School professor Jeremy Siegel.

Data source: Stocks for the Long Run, Jeremy Siegel.

Image source: Getty Images.

Impressive, right? Of course, America in 1802 was a bit different from America in 2024, so know that the trend continues into more recent periods. For example, over the 75 years between 1946 and 2021, stocks grew at an average annual rate of 11.3%, vs. 5.8% for long-term government bonds. The lesson here is that stocks outperform bonds over most long periods.

Where to invest your $1,000: a simple index fund

So how, exactly, should you go about investing in the stock market with your $1,000 (or whatever sum you have)? Well, a simple, low-fee index fund is a fine choice -- perhaps one that tracks the performance of the S&P 500 index of 500 of America's biggest companies.

The long-term annual average return of the S&P 500 is around 10%, so check out the table below, which shows how powerfully you might build wealth if your money grows at 10% -- or a more conservative 8%, since no stock market return is guaranteed, and the market can be volatile, especially over shorter periods.

Data source: Calculations by author.

I'm using annual investments of $10,000 because your $1,000 should be just a start. If you can sock away more than $10,000 annually, go for it, and if you can only manage $2,000 or $5,000, invest that.

Why index funds?

Here are a few reasons why you might favor index funds:

• Low fees: There are many different index funds, tracking the S&P 500 and other indexes. Some charge higher fees than others, but it's generally not hard to find very low annual fees (typically referred to as "expense ratios") -- such as 0.10% or less per year. If you invest $10,000 in an index fund with an expense ratio of 0.10%, you'll be paying only about $10 in fees for the year.
• Even Warren Buffett loves index funds. He has stipulated in his will that most of the money he's leaving his wife should go into a low-fee S&P 500 index fund. He even made a 10-year, million-dollar bet favoring them -- and won.
• Index funds outperform. Index funds tend to outperform their managed counterparts over long periods. Consider, for example, that according to the folks at S&P Dow Jones Indices, over the past 15 years, the S&P 500 index outperformed a whopping 88% of managed large-cap mutual funds, and it outperformed 87% over the past decade.
• Instant diversification: Once your money is in an S&P 500 index fund, it's spread across hundreds of companies -- even including the Magnificent Seven: Apple, Microsoft, Google parent Alphabet, Amazon.com, Nvidia, Facebook parent Meta Platforms, and Tesla. There are plenty of dividend-paying stocks, too, and the S&P 500 index recently sported a dividend yield of 1.32%.

Here's a terrific S&P 500 index fund

Meet the Vanguard S&P 500 ETF (VOO +0.00%). Its expense ratio is minuscule, at just 0.03%. And it's an exchange-traded fund (ETF) -- which is very much like a mutual fund but which trades like a stock.

To give you an idea of what's in the ETF, here are the recent top components of the S&P 500:

Source: Slickcharts.com.

The table below shows that this ETF (and other low-fee index funds that track the S&P 500) tend to perform rather well:

Data source: Morningstar.com.

If you invest in the Vanguard S&P 500 ETF, you're likely to see your investment grow substantially over a long period.

So give this solid index fund some serious consideration for a berth in your portfolio. And know that there are other great index funds, too.