Investing in the stock market can be intimidating, especially if you are a beginner. But it’s easier than it seems, even if you have little to no investing experience.
Where to invest is the most important decision you will have to make. Fortunately, there are plenty of investments that are great for beginners and those who just want a no-hassle option.
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While your investment choices are personal, there is one option that comes highly recommended by billionaire investor Warren Buffett: the S&P 500 index fund. Here’s why it’s such a fantastic investment, and how you can make hundreds of thousands of dollars while barely lifting a finger.
First, it’s wise to know what exactly an S&P 500 index fund is and why it can be a smart investment.
An index fund is generally a collection of stocks that track a specific market index. An S&P 500 index fund then follows the S&P500 (SNPINDEX: ^GSPC) and includes all stocks within that index, reflecting its performance over time.
Whether you’re new to the stock market or are simply looking for a safer and more reliable investment, there are several benefits to investing in an S&P 500 index fund:
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Instant diversification: By investing in just one S&P 500 index fund, you immediately own a stake in stocks of 500 companies from a wide variety of industries. Greater diversification can lower your risk, and investing in an index fund can make it almost effortless to properly diversify your portfolio.
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A large collection of strong shares: The S&P 500 itself only includes stocks of the largest and strongest companies in the US – ranging from tech giants like Apple And Microsoft to historical brands such as Coca-cola And Procter & Gamble. These companies are much more likely to survive periods of volatility, and if you invest in hundreds of these companies at once, you can rest assured that your portfolio is better protected.
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A fantastic track record: The S&P 500 has been around for decades and in that time has suffered some of the worst crashes and recessions imaginable. But so far it has recovered for everyone. Although no one can predict the future, it is very likely that it will also recover from future downturns.
Research also shows that as long as you invest for at least a few decades, it’s incredibly unlikely that you’ll lose money.
Analysts at Crestmont Research studied the historical performance of the S&P 500 over twenty-year periods and found that each of those periods ended in a positive total return. In other words, if you had invested in an S&P 500 index fund at any point in history and held it for 20 years—no matter how volatile the market was during that time—you would have made money.
All these benefits make the S&P 500 a reliable yet powerful investment – so much so that it is often recommended by Warren Buffett.
“In my opinion, the best thing for most people to do is own the S&P 500 index fund,” Buffett said during Berkshire Hathaway‘s 2020 annual meeting when discussing the ideal investment strategy for the average American. Through Berkshire Hathaway, he also owns two S&P 500 funds: The Vanguard S&P 500 ETF (NYSEMKT: VOO) and the SPDR S&P 500 ETF Trust (NYSEMKT: SPY).
In 2008, Buffett also famously bet $1 million that an S&P 500 index fund could beat a group of hedge funds in ten years. The five hedge funds averaged returns of about 36% during that time, while Buffett’s S&P 500 fund returned nearly 126%. Even the highest-earning hedge fund only achieved a total return of just under 88%.
“Let me emphasize that there was nothing aberrational about the behavior of the stock markets over the past decade,” Buffett later wrote about the experiment in an annual letter to shareholders.
He continued: “Taking advantage of the opportunities that arise not require great intelligence, a degree in economics or familiarity with Wall Street jargon… What investors need instead is the ability to ignore the fears or enthusiasm of the mafia and focus on a few simple fundamentals business.’
As Buffett’s experiment has proven, it pays to stay invested for the long term. Although the market can be volatile in the short term, investing regularly for at least a decade or two can help you earn significant returns.
Historically, the S&P 500 itself has averaged returns of about 7% per year. Your returns will obviously vary depending on how the market does in the coming years. But let’s say you earn an average annual return of 7% while investing $200 per month. Depending on how many years you invest, you will see approximately how much you can earn:
|
Number of years |
Total portfolio value |
|---|---|
|
10 |
$33,000 |
|
20 |
$98,000 |
|
30 |
$227,000 |
|
40 |
$479,000 |
Data source: Author’s calculations via Investor.gov.
Achieving total savings of $227,000 will require investments over about 30 years, but if you can stay in the market for a while longer, you can earn exponentially more. The sooner you start doing this, the easier it will be to make a lot of money.
The S&P 500 index fund can be a powerful way to invest with minimal effort, and with its exceptional long-term track record, it’s also a safer option than many other investments. By starting to invest now and staying in the market for the long term, you can earn more than you might think.
If our analyst team has a stock tip, it could be worth listening to. After all, Stock Advisors the total average return is 873% – a market-shattering outperformance compared to 176% for the S&P 500.*
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*Stock Advisor returns November 4, 2024
Katie Brockman holds positions in Vanguard S&P 500 ETF. The Motley Fool holds positions in and recommends Apple, Berkshire Hathaway, Microsoft, and Vanguard S&P 500 ETF. The Motley Fool recommends the following options: long January 2026 $395 calls to Microsoft and short January 2026 $405 calls to Microsoft. The Motley Fool has a disclosure policy.
Warren Buffett recommends most investors buy this index fund — and it could turn $200 a month into $227,000 or more. Originally published by The Motley Fool
