Most people need $1 million or more in order to retire comfortably. Saving that kind of money isn’t easy, but it’s also not as complicated as some people make it out to be. Investing is key, but you don’t have to bet big on some shiny new cryptocurrency or skyrocketing stock in order to grow your wealth.
In fact, one of the most well-traveled paths to millionaire status doesn’t require you to beat the market at all. All you have to do is wait and watch.
The problem with trying to beat the market
Beating the stock market by investing in the right rapidly growing companies can help you make a fortune pretty quickly — even overnight in some cases. But it’s risky. It’s hard to know which young companies are going to do well over the long term, and companies at the forefront of their industries typically don’t grow fast enough to make you rich quickly.
Even seasoned investors often struggle to beat the market. You may have heard about a bet Warren Buffett made with an investor named Ted Seides back in 2008. Seides believed that his hedge funds could outperform the S&P 500 index over 10 years, while Buffett believed they wouldn’t. After the decade was over, Buffett was declared the winner in a landslide, and Seides now says he wouldn’t make a bet like that again.
Yet millions of people continue to invest in costly mutual funds managed by investors trying to beat the market. Once in a while, they might come out ahead, but over the long term, there’s a much cheaper, easier way to grow your wealth.
If you can’t beat them, join them
In Warren Buffett’s famous bet, he chose to back a Vanguard S&P 500 index fund. Index funds, for those of you who aren’t familiar, are bundles of investments designed to mimic the performance of their underlying index. They contain all the same stocks in roughly the same quantities, and their annual returns tend to be pretty similar to the index itself.
Index funds technically have a slightly smaller return than the index because there are some fees, known as expense ratios, taken out. But index fund expense ratios can be as low as 0.03%, while some mutual funds can charge you 1% or more. That’s the difference between paying $300 per year on a $1 million portfolio or $10,000 per year.
Even with the fees, index funds can deliver excellent returns. A single $50,000 made at the beginning of 1991 would have been worth over $1 million by the end of 2020. That assumes you didn’t contribute any more money over time.
And you don’t need a huge lump sum like this at the start to make a fortune. People use index funds all the time to become millionaires while investing just a small percentage of their incomes. If you earn a 10% average annual rate of return, you could become a millionaire by investing just $179 per month for 40 years.
The best thing about investing in index funds is that it’s so easy. Your money is instantly diversified, so you don’t have to worry about losing it quite as much as you would if you put all your money in one basket trying to beat the market.
Plus, the stocks that make up index funds don’t change nearly as often as the stocks in most mutual funds. This low turnover means less work for fund managers, which is why index funds are so affordable.
How to start investing in index funds
You can invest in index funds through any broker. Most of them will say which index they’re tracking in the name, so it’s easy to find them. If you’re not sure which ones to start with, check out some of the top S&P 500 index funds. The S&P 500 is one of the most popular stock market indices and contains 500 of the largest companies in the U.S., so one of its index funds is a great choice for both new and experienced investors.
But while index funds can form a great foundation for your portfolio, you shouldn’t sink all your cash into them. Make sure you have some of your money in bonds and other safer assets and adjust your portfolio over time to account for your changing risk tolerance.
Once you’ve got an investment portfolio you’re happy with, you don’t have to check it every day. Even once or twice a year is enough. Investing this way won’t make you a millionaire quickly, but you have better odds of growing your wealth and hanging onto it for the long term if you do it this way.
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