Investing doesn’t have to be complicated. No need to research individual names for hours trying to find the next 10 bagger. Most experts would agree that when time is limited and you cannot do the necessary research, you should choose variety.
Index funds are a great way to get that diversity, and a great place to invest for the long term and see the growth compound nicely. Simply allocating a portion of your annual income to a few index funds can yield significant returns. Want $1 million in retirement? Buy these two index funds and hold them for decades.
The S&P 500 has made many people rich for decades. The fund is comprised of 500 largest companies from a variety of industries, with the S&P 500 considered the bellwether of the U.S. stock market.
Although the criteria is subject to change, currently, publicly traded companies must have a market capitalization of more than $18 billion and have been listed for at least one year (among other requirements) to join the S&P 500. (among others) is required. The breakdown of the top sectors is as follows: Index as of September 30th:
Information technology: 31.7%
Finance: 12.92%
Healthcare: 11.61%
Consumer voluntary: 10.1%
Communication services: 8.86%
Industrial: 8.51%
Daily necessities: 5.89%
Many people have gotten rich investing in the broader benchmark, the S&P 500. Legendary investor Warren Buffett, now 94 years old, says the power of time is one of the biggest contributors to his success. Let’s say you started investing in the S&P 500 in your 20s or early 30s and stayed invested for the next 30 years. The S&P 500 has delivered an average annual return of 10.7% over the past 30 years.
If you were able to invest $5,000 a year into the index, you could earn more than $1 million after 30 years at this rate. That’s a lot of money to invest each year, but it’s manageable at $416 per month if you donate monthly.
Also, $5,000 is below the annual contribution limit for IRAs and Roth IRAs, so you can invest it in a retirement account and have tax benefits when depositing funds or, in the case of Roths, withdrawing money nearing retirement. You can enjoy preferential treatment.
Concerned that the current market is too expensive? Next, try dollar-cost averaging, which involves investing a set amount of money in the S&P 500 on a regular basis. This evens out the 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 great index fund to look at is the S&P MidCap 400. This, as the name suggests, includes medium-sized companies. According to S&P Global, the average market capitalization of companies in the S&P MidCap 400 is $6.7 billion, making them much smaller than companies in the S&P 500 but larger than small-cap stocks.
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The S&P MidCap 400 is weighted heavily in industrial, financial, and consumer discretionary stocks. Mid-cap stocks offer investors greater growth potential than large-cap stocks without the same risks as small-cap stocks, which can fluctuate significantly with interest rates and economic conditions. Since 1995, the S&P MidCap 400 has outperformed both the S&P 500 and S&P SmallCap 600, generating an annualized total return of nearly 12%.
Exchange traded funds that track the S&P MidCap 400, such as Vanguard S&P MidCap 400 ETF (NYSEMKT: IVOO), have a beta of 1.2. Beta tells you how risky a stock or ETF is compared to the broader market. For example, the S&P 500 has a beta of 1, and stocks and ETFs with betas greater than 1 are more volatile than the broader market.
A beta value of 1.2 provides greater upside when the market is rising, but also greater downside when the market is struggling. Exposure to riskier assets can help you keep up with inflation over the long term.
Have you ever felt like you missed out on buying the most successful stocks? Then you’ll want to hear this.
On rare occasions, our team of expert analysts will issue a “Double Down” stock recommendation on a company we think is about to crash. If you’re already worried that you’re missing out on an investment opportunity, now is the best time to buy before it’s too late. And the numbers speak for themselves.
Amazon: If you invested $1,000 when it doubled in 2010, you would have earned $21,154. *
Apple: If you invested $1,000 when it doubled in 2008, you would have earned $43,777. *
Netflix: If you invested $1,000 when it doubled in 2004, you would have earned $406,992. *
We currently have “double down” alerts on three great companies, and we may not see an opportunity like this again anytime soon.
See 3 “Double Down” stocks »
*Stock Advisor will return as of October 21, 2024
Bram Berkowitz has no position in any stocks mentioned. The Motley Fool has no position in any stocks mentioned. The Motley Fool has a disclosure policy.
Want a $1 million retirement fund? 2 A simple index fund that you can buy and hold for decades. Originally published by The Motley Fool
