People who are very knowledgeable about the stock market often manage to build solid portfolios that reward them over time with strong returns. But beating the market isn’t your only path toward a millionaire retirement. Even if you know very little about investing and aren’t comfortable handpicking stocks for your long-term portfolio, there’s a simple move you can make to grow a lot of wealth in time for your senior years.
Rely on the broad market
Choosing individual stocks can be intimidating. You need to dig into those companies’ financials, figure out what challenges and risks they’re subject to, and determine whether their debt loads are reasonable.
Granted, if you’re willing to put in the time to learn how to vet a stock, you could be rewarded with a portfolio that outpaces the performance of the broad stock market. But if that’s something you’re nervous about doing, there’s another solution — loading up on S&P 500 index funds.
Index funds are passively managed funds with a goal of matching the performance of whatever benchmark they’re associated with. Some index funds have the aim of performing as well as the S&P 500, which is an index comprised of the 500 largest publicly traded companies.
When we talk about the stock market’s performance (as in, “the market was up today” or “the market took a dive”), we’re often talking about swings in the S&P 500 itself. That’s because that index is generally regarded as a measure of how the broad market is doing. So it makes sense to put your money into the S&P 500, especially if the idea of choosing individual stocks doesn’t sit right with you.
Between 1957 and 2021, the S&P 500 has rewarded investors with an average annual return of 10.67%. Now, let’s imagine you put your long-term savings into S&P 500 index funds over the next 40 years.
If you want to be a little conservative, you can say that your portfolio will deliver an average annual 8% return. Invest $600 a month, and you’ll end up with a nest egg worth over $1.8 million. Make it $1,000 a month, and you’re looking at closing out your career with $3.1 million.
Don’t spin your wheels
If you have the appetite for handpicking stocks, you might manage to put together a portfolio that outperforms the S&P 500. But if that’s not in your wheelhouse, loading up on S&P 500 index funds is a very reasonable and viable alternative.
Furthermore, if you’re saving for retirement in an employer-sponsored 401(k) plan, you’re not even allowed to choose individual stocks in which to invest. Rather, you’ll generally be limited to a number of different funds to put your money into. But 401(k)s will usually offer at least one index fund that tracks the S&P 500, so look out for that option in your plan if that’s a route you want to take.
Investing in the broad market is also a great way to buy yourself some peace of mind. So there’s no need to stress out about choosing the right stocks when you can let yourself off the hook.