For many people, the idea of building an investment portfolio can be daunting. Choose the wrong stocks, and you risk losing money instead of building wealth for retirement.
Investing giant Warren Buffett has said many times over that the average saver can do well for themself by putting their nest egg into an S&P 500 index fund. But can you really retire on that investment alone? Let's dig in.
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Why relying on an S&P 500 index fund is a viable choice
The S&P 500 index tracks roughly the 500 largest publicly traded U.S. companies. The reason it could work as your sole retirement investment is that it gives you access to a wide range of companies across many industries.
If you invest $500 a month in an S&P 500 index fund that delivers an 8% annual return, which is actually below the index's average, then in 40 years, you could be sitting on a retirement nest egg worth over $1.5 million. So if you don't want to deal with the hassle of choosing individual stocks for your portfolio, falling back on an S&P 500 index fund is a perfectly reasonable choice.
That said, one issue with retiring on just an S&P 500 index fund is that your portfolio won't beat the broad market. But if you're willing to sacrifice some returns for simplicity, then this strategy could work perfectly well for you.
Be careful as retirement gets closer
While an S&P 500 index fund is a reasonable tool for building retirement wealth, once that milestone gets closer, you don't want your entire portfolio invested in the S&P 500.
The stock market can be very volatile. And if you're reaching a point when you're ready to tap your retirement portfolio for income, you need a mix that includes assets that are less prone to wild swings.
At that point, one thing you could do is keep about half of your portfolio in an S&P 500 index fund and put the other half into cash and bonds, depending on your comfort zone. Or, you may decide to move out of an S&P 500 index fund and focus on dividend stocks or ETFs instead, which may provide your portfolio with more income.
All told, it's possible to retire on an S&P 500 index fund. And Warren Buffett certainly thinks it's a good option for everyday investors to consider. Just make sure to adjust your strategy as retirement nears so you don't expose yourself to undue risk once you're ready to tap the savings you've worked hard to build.
