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Becoming a millionaire in the stock market may seem like a lofty goal, but it’s more attainable than you might think.
You don’t need to be rich to generate wealth in the stock market, but you do need the right investments. While there are seemingly endless options to choose from, there’s one, in particular, that legendary investor Warren Buffett strongly endorses: The S&P 500 index fund.
In fact, in Berkshire Hathaway‘s 2020 annual meeting, Warren Buffett explained that when it comes to choosing investments, “for most people, the best thing to do is to own the S&P 500 index fund.”
S&P 500 index funds can be a smart option in many cases, and they could also help you become a stock market millionaire. Here’s how.
Image source: The Motley Fool.
What are S&P 500 index funds?
The S&P 500 itself is a stock market index that includes stocks from 500 of the largest and strongest companies in the U.S. This index is generally considered a strong representation of the stock market as a whole, as the companies within the index span a wide variety of industries.
While it’s impossible to invest in the index itself, you can invest in an S&P 500 index fund. This type of investment aims to mirror the performance of the S&P 500, containing the same stocks as the index.
There are many different funds to choose from, but some of the most popular options include the Vanguard S&P 500 ETF (NYSEMKT: VOO) or the iShares Core S&P 500 ETF (NYSEMKT: IVV).
Historically, the S&P 500 itself has earned an average rate of return of around 10% per year. This doesn’t necessarily mean you’ll earn 10% returns each year. Rather, your investments will have good and bad years, earning returns higher or lower than the average. However, over decades, those highs and lows should average out to around 10% per year.
Perhaps the most appealing aspect of S&P 500 index funds, though, is that they’re maintenance-free investments. You never need to worry about choosing individual stocks or deciding when to buy or sell. All you need to do is invest whatever you can afford, then let the fund do the rest of the work for you.
Reaching $1 million with S&P 500 index funds
This type of investment may not experience explosive growth, but it can help you earn a significant amount of money over time.
Say, for example, you’re investing in an S&P 500 index fund and are earning a 10% average annual return. Here’s how much you’d need to invest every month to reach $1 million, depending on how many years you let your money grow.
Number of Years
Amount Invested Each Month
Total Savings
40
$200
$1.062 million
35
$325
$1.057 million
30
$525
$1.036 million
25
$850
$1.003 million
20
$1,500
$1.031 million
Source: Calculations by author via Investor.gov
The more time you have, the less you’ll need to invest each month to accumulate a significant amount of money. But even if you’re off to a late start, it’s still possible to reach $1 million if you’re able to boost your savings.
Also, while it does take decades to build a million-dollar portfolio, keep in mind that S&P 500 index funds require virtually zero effort on your part. Other than making regular contributions, you don’t need to do a thing to grow your money.
S&P 500 index funds can be a smart option for many investors, particularly those who prefer a hands-off approach. By investing consistently and giving your money as much time as possible to grow, you’ll be on your way to becoming a stock market millionaire.
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Katie Brockman owns Vanguard S&P 500 ETF. The Motley Fool owns and recommends Berkshire Hathaway (B shares) and Vanguard S&P 500 ETF. The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.
