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Many people have lofty goals when it comes to building wealth. You may want to accumulate $1 million in your retirement plan by age 60. Or maybe you want to accrue a more substantial sum of money, and at an earlier age.
Investing could be your ticket to growing substantial wealth. But what if you really don’t know much about the stock market? If that’s the case, you’re in good company. And you’re also far from doomed.
In fact, there’s one trick you can employ that could set the stage for major growth in your investment portfolio. It’s a strategy investing guru Warren Buffett has advocated for years, and it could work wonders for you.
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Grow wealth without breaking a sweat
Stock-picking wizards can do quite well for themselves by assembling diverse portfolios that perform well over time. But if that’s something you don’t feel you’re capable of doing, worry not. There’s another approach you can take, and one that Buffett himself thinks is wise for the everyday investor — loading up on broad market index funds.
Index funds are passively managed funds whose goal is to match the performance of the market indexes they’re tied to. If you invest your money in an S&P 500 index fund, for example, the goal of that fund will be to do as well as the S&P 500 itself.
The S&P 500 is a good index to invest in because it consists of the 500 largest publicly traded company. When people talk about the performance of the stock market on a whole, often, they’re referring to how the S&P 500 itself is doing.
Loading up on broad market index funds, like S&P 500 index funds, is a simple way to build yourself a diverse portfolio without having to spend time researching individual stocks. It also means not having to worry about choosing the wrong stocks — and losing sleep in the process.
Take Buffett’s advice
To be clear, Buffett doesn’t suggest investing in index funds if you’re great at picking stocks and your goal is to beat the market. Frankly, index funds won’t let you do that. But if you consider yourself a skittish investor with limited stock-picking knowledge, then loading up on broad market index funds is a good bet.
In fact, in 1993, Buffett actually wrote in a shareholder letter that by periodically investing in an index fund, the know-nothing investor can actually outperform most investment professionals. It’s for this reason that long-term savers are often advised to invest their retirement plans in index funds instead of actively managed mutual funds. Not only do index funds charge lower fees, but they commonly outperform their actively managed counterparts.
Of course, if you’re willing to put in the time and research, you might manage to build an investment portfolio that outperforms the broad market over time. But if you’d rather take the easier route, load up on index funds.
The S&P 500 has delivered an average annual return of about 10.5% since 1957. If you put $500 a month into an S&P 500 index fund over the next 30 years and enjoy that same return, you’ll end up with almost $1.1 million. And you have to admit — that’s not a bad sum of money for doing virtually no work.
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