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You may have lofty goals as an investor, and one of those may be to turn your money into a much larger sum over time. But to pull that off, you’ll need to assemble a solid portfolio. And if you’re new to the stock market, you may not feel confident in your ability to choose a mix of companies that will make your goals achievable.
If that’s the case, worry not. One simple move on your part could make it possible to triple your money — even if your knowledge of stocks is fairly limited.
Why investing in the broad market makes sense
The stock market consists of many different sectors, and within each sector, many different companies. You could spend hours upon hours trying to figure out which stocks have a place in your portfolio. But if you don’t have the time or appetite for that, there’s another solution that could make you very wealthy — loading up on broad market index funds.
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Index funds are passively managed funds whose goal is to match the performance of the various benchmarks they’re tied to. Index funds charge very low fees (known as expense ratios) because they don’t hire fund managers to hand-pick stocks. Rather, their strategy is to simply pick an index and try to do as well as that index.
Now there are different index funds you can choose to put your money into. But if you have big goals and limited knowledge of the stock market, you may want to opt for an S&P 500 index fund.
The S&P 500 consists of the 500 largest publicly traded companies, and it’s regarded as a measure of how the stock market on a whole is performing. With an S&P 500 index fund in your portfolio, you get immediate diversification. And you might also enjoy some very respectable returns.
Between 1957 and 2021, the S&P 500 has delivered an average annual return of around 10.5%. Now this isn’t to say that the index has returned 10.5% every year during that window. Remember the Great Recession? The index didn’t do well at all during that time.
But all told, the S&P 500 has rewarded investors who stuck with it for many years. And if you’re willing to do the same, you might triple your money before you know it.
So, let’s say you have $10,000 to invest, and you decide to put that cash into an S&P 500 index fund and leave it alone without adding a dollar more. If that index fund delivers an average annual 10.5% return, in 11 years’ time, you’ll have tripled your money. Leave that cash alone for 22 years, and you’ll have nine times your initial investment, or $90,000, assuming that same 10.5% return.
Investing doesn’t have to be complicated
One limitation of S&P 500 index funds is that they won’t help your portfolio outperform the broad market. But if you’re happy with the idea of matching the broad market’s performance, then buying S&P 500 index funds is an easy way to build a portfolio when you’re first starting out.
You can always branch out into choosing individual stocks as your investing knowledge grows. But even if you never reach the point where you’re comfortable going that route, S&P 500 index funds can be a very lucrative fallback option.
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