Investing in the S&P500 (SNPINDEX: ^GSPC) has historically been a great way for someone to grow their wealth. As a benchmark for the broad market, the index tracks 500 of the largest and most successful American companies.
Although you can’t invest directly in the S&P 500, a number of exchange traded funds (ETFs) track the index at low cost. And since these ETFs spread your money across hundreds of stocks, betting on the S&P 500 can be a way to invest in the stock market with less risk than picking individual stocks.
It may not always be possible to put a large lump sum into the stock market. However, if you receive an inheritance or make a profit from the sale of a home, you may be able to make a significant investment even if you don’t have much savings.
Below, I’ll look at whether investing $50,000 in an S&P 500 index fund can put you on track to having $1 million in retirement, a goal many people have to live comfortably in their golden years.
Going back almost a century, the compound annual return for the S&P 500, including dividends, is 10.1%. But over the past decade, the index’s return has been even more impressive: 13.7%. While that’s great news for investors who invested during that period, the outlook for the next decade may not be so bright.
Goldman Sachs For example, analysts predict that the S&P 500 may only generate an average annual return of 3% over the next decade due to high valuations and the resulting concentration of value in the index’s largest investments. JPMorgan Analysts believe the index will deliver an annual return of just 6% over the next decade.
Simply put, investing in the index today could yield significantly lower returns than investors have become accustomed to in recent history.
But for someone starting or in the middle of their career, investing their retirement savings means thinking beyond the next decade. So even if returns for the index are relatively weak over the next five or ten years, the S&P 500 could still make up for those slow years with better returns down the road. There are simply too many factors that can weigh on the markets, making it virtually impossible to predict exactly what the market will do so many years into the future.
Rather than trying to guess exactly what the annual return for the S&P 500 will be over the next decade and beyond, the table below illustrates what a $50,000 investment could be worth under different scenarios.
Table and calculations by author. Amounts rounded to the nearest hundred.
The reality is that while a one-time investment of $50,000 may be a significant amount of money, it will take many years and provide solid returns to grow to $1 million.
One way to help increase these numbers is to contribute to your holdings over time. Even if you can put a large lump sum into the stock market today, adding to your portfolio periodically can be an effective way to accelerate your gains.
You may look at the table above and think it’s not worth investing in the S&P 500 if returns may decline in the coming years. Or you may think it’s better to prioritize other investments, such as growth stocks. Keep in mind that the potential for higher returns also means taking on more risk, and not everyone is comfortable with the added volatility that such an approach brings.
Meanwhile, a bet on the S&P 500 offers instant diversification, and its focus on large, high-quality companies still makes it one of the most reliable ways to invest in the stock market. But even if you have $50,000 to start your journey, patience is needed to give your investment the time it needs to grow into a good savings account.
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JPMorgan Chase is an advertising partner of Motley Fool Money. David Jagielski has no position in the stocks mentioned. The Motley Fool holds positions in and recommends Goldman Sachs Group and JPMorgan Chase. The Motley Fool has a disclosure policy.
Today, is investing $50,000 in the S&P 500 a surefire way to reach $1 million by retirement? was originally published by The Motley Fool