Investing doesn’t have to be complex. You don’t need to do hours and hours of research on individual names and try to find the next 10-bagger. Most experts would agree that if your time is limited and you can’t do the necessary research, choose diversity.
Index funds are a great way to get that diversity and a great place to invest for a long time and see your growth compound nicely. Simply allocating some of your earnings each year to a few index funds will pay off handsomely. Want $1 million in retirement? Buy these two index funds and hold them for decades.
The S&P 500 has made many people rich over decades. The fund comprises 500 large companies in many industries, and the S&P 500 is considered a bellwether for the U.S. stock market.
While the criteria can change, publicly traded companies currently must have a market capitalization of more than $18 billion and have been public for at least a year (among other requirements) to be eligible for the S&P 500. Here is a breakdown of the top sectors in the index as of Sept. 30:
Information technology: 31.7%
Financials: 12.92%
Healthcare: 11.61%
Consumer discretionary: 10.1%
Communication services: 8.86%
Industrials: 8.51%
Consumer staples: 5.89%
Many people get rich by investing in the broader benchmark S&P 500. Legendary investor Warren Buffett, who is now 94, says the power of time has been one of the greatest contributors to his success. Let’s say you start investing in the S&P 500 in your 20s or early 30s and then invest for 30 years. The S&P 500 has delivered average annual returns of 10.7% over the last three decades.
If you can invest $5,000 into the index annually, at this rate, you would have more than $1 million after 30 years. That’s a lot to invest each year, but if you contributed each month, that would be a more manageable $416 a month.
And $5,000 is under the annual IRA and Roth IRA contribution limits, so you could invest in a retirement account and reap tax advantages as you deposit the funds or — with a Roth — when you make withdrawals closer to retirement.
Concerned the market is too high right now? Then try dollar-cost averaging, in which you invest a fixed amount of money in the S&P 500 over regular intervals, which will smooth out your cost basis over time. An easy way to buy the S&P 500 index is through an exchange-traded fund such as the SPDR S&P 500 ETF Trust (NYSEMKT: SPY).
Another good index fund to look at is the S&P MidCap 400, which, as the name suggests, contains companies of medium size. According to S&P Global, the average market cap of a company in the S&P MidCap 400 is $6.7 billion, so they are much smaller than companies in the S&P 500 but larger than small caps.