Investing your money is a great way to grow it into a much larger sum over time. But that’s not guaranteed to happen.
If you build a portfolio of stocks that all underperform, you could end up losing money rather than gaining it. While researching companies thoroughly before buying them might minimize your chances of taking losses, it’s still a risk.
That’s why putting your money into a reliable investment might help you sleep better at night. While there’s definitely no such thing as a risk-free investment, there’s a degree of protection that comes with buying S&P 500 index funds.
Index funds are passively managed funds with a goal of matching the performance of whatever benchmark they’re tied to. S&P 500 index funds have the goal of performing comparably to the S&P 500 index itself, which is comprised of 500 leading publicly traded companies.
Though it’s definitely possible to lose money with S&P 500 index funds, you’re more likely than not to gain money over time. That’s because the S&P 500 itself has a solid history of delivering strong returns.
This isn’t to say that the S&P 500 winds up ahead every year. But over the course of the past 65 years, it’s delivered an average annual return of about 10.5%.
And that’s not the only thing that makes S&P 500 index funds a great investment. Here are a couple of other reasons.
1. They’re easy to invest in
When you buy individual stocks, there are a lot of different factors you need to look at. These include cash flow, debt, management, threats, and opportunities.
S&P 500 index funds don’t require that kind of legwork because you’re not putting a substantial amount of money into one specific company. Rather, you’re buying a bucket of stocks that you’re hoping will perform well over time.
This isn’t to say that you shouldn’t care about how stocks within the S&P 500 perform individually — particularly those with larger market caps. But remember, if you own S&P 500 index funds and a single stock has a bad day, it may not have such a huge influence, given that it’s one out of 500. And that takes the pressure off of you, as an investor.
2. They lend to diversity
It’s important to maintain a diverse portfolio. Not only will that help shield you from losses, but it could also lead to more wealth accumulation through the years. The great thing about S&P 500 index funds is that they’re super diverse because you’re getting to own 500 different stocks with a single investment.
Let’s imagine that instead of owning S&P 500 index funds, you decide to go heavy on tech stocks. If that sector tanks, your portfolio value might plummet. But while the S&P 500 definitely has its share of tech stocks, it also consists of stocks across a range of other industries.
Are S&P 500 index funds right for you?
If your goal is to outperform the entire stock market, then S&P 500 index funds won’t help you do that. But to be clear, beating the market isn’t always an easy thing to do and takes a lot of work. If you’re content with matching the performance of the broad market in your personal portfolio, then loading up on S&P 500 index funds is a move that could serve you very well throughout the years.
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