If you're an investor who just wants to put money into the stock market today and forget about it, the S&P 500 index can help you generate some terrific returns. The broad index tracks the leading stocks on U.S. exchanges and can give you broad, comprehensive exposure to the overall market without investing in small or risky companies.
You have probably heard that investing in the market and perhaps the index has historically been a good move. But how good could its future gains be, and could investing $50,000 into an exchange-traded fund (ETF) that tracks the S&P 500 create a portfolio worth at least $1 million by the time you retire? Let's take a look.
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Compounded returns can add up significantly over the years
Historically, the S&P 500 has generated annual returns of around 10%. That may not seem like much if your goal is to generate significant growth. But this is where patience can pay off richly.
Let's assume you invest in the market and your average annual return is 10% over 10 years. By then, your investment will have more than doubled and be worth around 2.6 times its original value. And let's say you hold on for even longer -- 25 years. If you still end up averaging a 10% annual return, your portfolio will have grown to 10.8 times its original value.
This is why over the long term, anyone can conceivably amass significant returns, regardless of their investing abilities. There's no secret to it: Investing in an exchange-traded fund (ETF) like the Vanguard S&P 500 ETF (VOO -0.85%), which tracks the broad index, can be a great long-term strategy that yields impressive results.
Projecting S&P 500 returns over the long run
Rather than trying to guess what rate the S&P 500 will grow at in the future, I've created a table showing you a range of possibilities, with annual returns between 8% and 12%, using a $50,000 investment in the Vanguard S&P 500 ETF or similar ETF over at least 25 years. This can allow you to see both a worst-case scenario (the investment underperforms the S&P's historical average) and a best-case scenario (it does far better than usual).
| Years | 8% Growth | 9% Growth | 10% Growth | 11% Growth | 12% Growth |
|---|---|---|---|---|---|
| 25 | $342,424 | $431,154 | $541,735 | $679,273 | $850,003 |
| 30 | $503,133 | $663,384 | $872,470 | $1,144,615 | $1,497,996 |
| 35 | $739,267 | $1,020,698 | $1,405,122 | $1,928,743 | $2,639,981 |
| 40 | $1,086,226 | $1,570,471 | $2,262,963 | $3,250,043 | $4,652,549 |
Calculations and table by author.
While it is possible to get to $1 million from investing $50,000 into an S&P 500 ETF today, if the market underperforms, it could take 35 years or more to reach that milestone. The biggest unknown and most difficult variable to account for is the growth rate, which has a massive impact on your gains, as you can see from the table above.
Why investing in the Vanguard S&P 500 ETF can be a great move
By investing in the Vanguard S&P 500 ETF (or a similar fund), you will have a solid pillar upon which to build your portfolio. You can make smaller investments into other stocks, but if you have the bulk of your money in an investment with exposure to the S&P 500 index, that can give you a lot of long-term stability.
And even if you're not confident about how the market will do in the long run, odds are you'll still be better off sticking with an ETF like this. Many fund managers struggle to outperform the index.
And as confident as you may be about your stock-picking abilities, when deploying a buy-and-hold strategy for retirement that may span decades, it can be a lot easier and less risky to simply put that money into an ETF that tracks the S&P 500.
