Investing in the S&P 500 has historically yielded strong gains for investors. While its returns can vary from one year to another, for decades, its average annual return is about 10%. At that rate, your investment would double after roughly seven years.
While you can't directly buy units of the S&P 500 index, you can invest in exchange-traded funds (ETFs) that track it. A popular option for investors is the SPDR S&P 500 ETF (SPY 1.14%) for its low fees, as its expense ratio is fairly minimal at 0.09%.
For many investors, it could make more sense to invest on a monthly basis rather than putting in a large lump sum right away and waiting for it to grow. Below, I'll look at how much a $250-per-month investment in the SPDR S&P 500 ETF could turn into after 25 years.
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The ETF's returns may vary, but they can still lead to significant gains
Given that the stock market has been red hot and the S&P 500 has risen by close to 80% in just three years, I think it's a good idea to factor in a conservative outlook for the future and the possibility of lower returns. In the table below, I've calculated what a $250-per-month investment in the SPDR S&P 500 ETF might grow to, even if the growth rate were to trend lower to 9% or even 8%.
| Year | 8% Growth | 9% Growth | 10% Growth |
|---|---|---|---|
| 5 | $18,492 | $18,997 | $19,521 |
| 10 | $46,041 | $48,741 | $51,638 |
| 15 | $87,086 | $95,311 | $104,481 |
| 20 | $148,237 | $168,224 | $191,424 |
| 25 | $239,342 | $282,383 | $334,473 |
Table and calculations by author.
Even if you end up averaging a persistently low return of 8% for the long term, your portfolio's balance would be worth nearly $240,000. But if you do end up averaging a return of 10%, then your balance would total more than $334,000. It's a significant variance, and it highlights just how much of an impact even a couple of percentage points can have on your future gains. Unfortunately, it's not something that's possible to predict, given all the things that can change over such a long period.
However, the key takeaway to remember is that by setting aside money every month to put into the SPDR S&P 500 ETF, you can steadily increase your portfolio's balance over time. Although you won't know what your returns will end up being, you will know that your investment is likely to rise substantially in the long run. By investing monthly, it also eliminates the temptation to try to time the market. Adopting a straightforward approach of investing $250 each month can take the guesswork out of your strategy.
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Key Data Points
Why investing in the SPDR S&P 500 ETF is a good move for all investors
No one has a crystal ball to know what kind of return you will end up averaging over the very long term. But one thing that is a near certainty: investing in funds that track the S&P 500 index will lead to strong returns. It's simply a matter of how high those returns might be.
Whether you're a growth investor, a dividend investor, or you're just starting out, the SPDR S&P 500 ETF can be an excellent pillar to build your portfolio around and hold on to for decades. It can allow you to take on some risk along the way with other investments, knowing that the bulk of your money is still invested in a safe ETF that's tracking the broad market.
There are also other S&P 500 index funds to choose from. Or, if you prefer, you can invest in other ETFs that focus on certain areas of the market, rather than everything. But by sticking with a diversified fund, you can ensure that your risk remains relatively low.
