Can you become a millionaire by simply investing in an index fund that tracks the broader market? It depends on many factors, but the short answer is yes.
If you only have $1,000 to invest in total, it isn't likely to make you a millionaire in your lifetime. It just isn't that easy to find any investment that can turn $1,000 into $1 million. There are few stocks on the market that have accomplished that feat, but virtually no one knew which ones would be winners ahead of time.
However, if you can save $1,000 a month, it can turn into $2 million. Here's how it can be done.
Why SPY
SPY is the SPDR S&P 500 ETF Trust (SPY 0.52%), the original index-tracking exchange-traded fund (ETF) that spawned an industry of index-tracking ETFs.
It follows the S&P 500, which means it also has about 500 components weighted according to market cap. Like the index, its top five stocks are Microsoft, Nvidia, Apple, Amazon, and Meta Platforms.
Image source: Getty Images.
Investing in this ETF gives investors access to the market without having to figure out which stocks to buy, providing exposure to a broad range of the largest U.S. companies while minimizing risk. It's an ETF that has earned investors' trust over time, and it has an expense ratio of 0.09%, which means you're not paying a huge manager's fee for someone to actively manage your fund. Most fund managers underperform the market in a given year, anyway.
The S&P 500 has increased at an annualized rate of about 10.5% during the past 30 years or so, and having your money, or a percentage of your portfolio, compound at that rate can yield attractive results.
Notably, Warren Buffett owned SPY as part of the Berkshire Hathaway portfolio for about five years, only selling out of it, as well as the other S&P 500 ETF it owned, the Vanguard S&P 500 ETF, in the 2024 fourth quarter.
He has said on several occasions that investing in an index fund that tracks the broader market is the right way for most people to invest their money. "Find businesses, get a cross section," he said at the 2020 Berkshire Hathaway annual meeting. "In my view, for most people, the best thing to do is to own the S&P 500 index fund."
The magic of compounding
If you really only have $1,000 to invest in SPY, it's not going to turn into $1 million within your lifetime. Over 30 years, compounding at a rate of 10%, which is what it has gained on an annualized basis since launching in 1993, you would have about $17,500.
However, if you can put aside $1,000 to invest monthly for 30 years, and you start out with $10,000, you'll have more than $2 million.
Image source: Investor.gov
If you don't have $10,000 to start, or if you have a different timeline to invest, your results will look different. For example, if you only have $1,000 to start, you'd still come out with close to $2 million after 30 years. If you only have 20 years before you need your money, you'd come out with more than $750,000. But you would still become a millionaire if you simply save $1,000 monthly and invest it in SPY for 23 years.
Can you beat the market and achieve even greater results than this? You can, and many individual investors succeed by having a diversified portfolio of excellent stocks. However, in addition to that, owning SPY gives investors the opportunity to grow along with the market, minimizing some of the risk associated with owning fewer stocks. It's a great strategy for most investors.
