Investing Simplified: Why You Should Consider an S&P 500 Index Fund
Investing in the stock market can be daunting for beginners. Yet, with the right knowledge, it doesn’t have to be complicated, even if you have limited experience.
Your choice of where to invest is crucial. Fortunately, several options suit beginners who seek a straightforward approach.
One highly recommended choice comes from billionaire investor Warren Buffett: the S&P 500 index fund. Here’s why this investment could help you earn significant returns with minimal effort.
Image source: The Motley Fool.
Understanding the S&P 500 Index Fund
First, let’s clarify what an S&P 500 index fund is and why it might be a smart investment choice.
An index fund collects stocks that mimic a particular market index. The S&P 500 index fund tracks the S&P 500 (SNPINDEX: ^GSPC) and includes all the stocks in that index, reflecting its performance over time.
If you’re a newcomer to investing or prefer a dependable option, consider these advantages of an S&P 500 index fund:
- Diversification from the start: Investing in a single S&P 500 index fund provides you with shares from 500 different companies across various industries. This level of diversification can reduce your risk.
- Strong stock selection: The S&P 500 consists of shares from leading corporations in the U.S., including Apple and Microsoft, alongside classic brands like Coca-Cola and Procter & Gamble. These firms are better positioned to withstand market fluctuations.
- Proven performance: Over many decades, the S&P 500 has endured economic downturns but has fully recovered each time. While future performance can’t be guaranteed, historical trends suggest it will likely rebound from possible downturns.
Studies indicate that if you invest for at least two decades, the chances of losing money are incredibly low.
Research by Crestmont Research showed that every 20-year period in the S&P 500’s history has ended with positive returns. This means that investing in an S&P 500 index fund and holding it for 20 years would most likely yield profit, regardless of market volatility.
Buffett’s Endorsement
Given its benefits, it’s no wonder Warren Buffett advocates for the S&P 500. At Berkshire Hathaway’s 2020 annual meeting, he stated, “In my view, for most people, the best thing to do is to own the S&P 500 index fund.” Buffett himself invests in 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 famously wagered $1 million that an S&P 500 index fund would outperform a group of hedge funds over a decade. The hedge funds averaged around 36% returns, while Buffett’s index fund achieved nearly 126%. Remarkably, the best-performing hedge fund yielded just under 88% in total returns.
Buffett emphasized that these results were not extraordinary by stock market standards. He noted that successful investing does not require advanced knowledge but rather an ability to ignore market trends and adhere to fundamental principles.
Building Wealth with Patient Investing
Buffett’s example underlines the value of long-term investing. Although the market can fluctuate, consistent investment for ten or more years can lead to significant rewards.
Historically, the S&P 500 has returned an average of around 7% annually. While your results may differ based on market conditions, consider this: if you consistently invest $200 a month at a 7% average return, your potential earnings could grow significantly over time:
| 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.
While reaching $227,000 takes about 30 years, remaining in the market longer can yield even greater profits. Therefore, starting your investment journey sooner can lead to substantial financial rewards.
The S&P 500 index fund offers a reliable way to invest with minimal effort, backed by a strong historical performance. By committing to long-term investment, you can achieve more than you might expect.
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Katie Brockman has positions in Vanguard S&P 500 ETF. The Motley Fool has 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 on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.
