It may seem like your best bet, but there's more to the story.
The money you work hard to set aside for retirement shouldn't just sit in cash. It's important to invest that money so it grows at a fast enough clip to outpace inflation and provide you with the buying power you need later in life.
When it comes to investing your retirement savings, you have choices. Some people opt to assemble a portfolio of hand-picked stocks, while others might opt to fall back on an S&P 500 index fund.
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If you go the latter route, don't assume you're making a mistake. Investing legend Warren Buffett has said many times over that the typical saver can do quite well by investing in an S&P 500 index fund. But is that the best option for you?
It's a matter of effort and knowledge
If you're not familiar with index funds, they're passively managed funds that aim to match the performance of the market benchmarks they're associated with. An S&P 500 index fund is designed to mimic the performance of the S&P 500 itself, which consists of the 500 largest publicly traded companies today.
The nice thing about investing in an S&P 500 index fund is that you're getting instant diversification in your portfolio. The passive nature of index funds also tends to make them available to investors without the high fees that are commonly associated with actively managed mutual funds.
If you're someone who doesn't have the time or knowledge to hand-pick a portfolio of stocks, then you may decide to fall back on an S&P 500 index fund for your retirement portfolio. And there's really nothing wrong with that.
However, if you do have some investing knowledge and you are willing to do the work, you may find that your portfolio is able to outperform the S&P 500 through the years. The result? A higher retirement plan balance.
Be honest with yourself
Some people start saving for retirement with zero investing knowledge and grow their stock-picking skills over time. As such, one thing you may want to do is begin by investing in an S&P 500 index fund, but then eventually grow your portfolio as you learn more about how to pick stocks yourself.
But at the end of the day, your approach to investing for retirement should really boil down to the work you're willing to put in. Even if you know a thing or two about hand-picking stocks, if you're not willing to keep tabs on your portfolio, an S&P 500 index fund may be a better bet. But if you're confident you'll be able to carve out the time to continuously research stocks and keep track of the ones you own, then hand-picking investments could make it possible to beat the S&P 500.
Of course, falling back on the S&P 500 could still prove to be quite rewarding. Over the past 50 years, the index has averaged an annual 10% return. This means that if you were to invest $300 a month in an S&P 500 index fund over 40 years, at that return, you'd end up with almost $1.6 million. So while it may be possible to do better with a portfolio you put together yourself, know that you're not exactly doomed if you decide you just aren't up to the task.
FAQs
Investing in a broad market index fund can take a lot of the guesswork away. If you're not a confident investor, an S&P 500 index fund could be your best choice. If you're willing to do the work and research stocks individually, you might enjoy stronger gains in your retirement account.
Is the S&P 500 index fund a good investment? ›
S&P 500 index funds can help you instantly diversify your portfolio by providing exposure to some of the biggest companies in the U.S. Index funds in general are fairly inexpensive compared with other types of mutual funds, making them an attractive option for most investors.
Is now a bad time to invest in the S&P 500? ›
It's unclear where the S&P 500 is headed in the coming months, but the best thing you can do right now is to continue investing consistently. By keeping your money in the market for the long haul, you can minimize risk while maximizing your earnings potential over time.
What is the best performing S&P 500 index fund? ›
Compare the best S&P 500 index funds
| FUND | TICKER | 10-YEAR ANNUALIZED RATE |
|---|
| Fidelity 500 Index Fund | FXAIX | 12.95% |
| Vanguard 500 Index Fund Admiral Shares | VFIAX | 12.92% |
| Schwab S&P 500 Index Fund | SWPPX | 12.90% |
| State Street S&P 500 Index Fund Class N | SVSPX | 12.82% |
Investing products such as stocks can have much higher returns than savings accounts and CDs. Over time, the Standard & Poor's 500 stock index (S&P 500), has returned about 10 percent annually, though the return can fluctuate greatly in any given year. Investing products are generally very liquid.
Is it better to invest in index funds or 401k? ›
A 401(k) account's major edge over an index fund is the tax advantage. Contributions to 401(k) accounts are pre-tax. Owners don't pay taxes on dollars they put in or the earnings from their investment portfolio until they start withdrawing funds.
What are the disadvantages of the S&P 500 index fund? ›
The main drawback to the S&P 500 is that the index gives higher weights to companies with more market capitalization. The stock prices for Apple and Microsoft have a much greater influence on the index than a company with a lower market cap.
What if I invested $1,000 in the S&P 500 10 years ago? ›
Over the past decade, you would have done even better, as the S&P 500 posted an average annual return of a whopping 12.68%. Here's how much your account balance would be now if you were invested over the past 10 years: $1,000 would grow to $3,300. $5,000 would grow to $16,498.
What is the average return on the S&P 500 index fund? ›
Bottom Line. Since 1957, the S&P 500's average annual rate of return has been approximately 10.5% (through March 2023) and around 6.6% after adjusting for inflation.
Is the S&P 500 a good investment in 2024? ›
The S&P 500 generated an impressive 26.29% total return in 2023, rebounding from an 18.11% setback in 2022. Heading into 2024, investors are optimistic the same macroeconomic tailwinds that fueled the stock market's 2023 rally will propel the S&P 500 to new all-time highs in 2024.
The easiest and most efficient way to invest in the S&P 500 is via a low-cost exchange-traded fund (ETF). Several ETFs track the S&P 500, but the oldest and most popular is the SPDR S&P 500 ETF Trust (SPY). SPY was the first ETF to hit the US market in January 1993 and is now the world's most heavily traded ETF.
What is the best time of day to buy S&P 500? ›
The opening period (9:30 a.m. to 10:30 a.m. Eastern Time) is often one of the best hours of the day for day trading, offering the biggest moves in the shortest amount of time. A lot of professional day traders stop trading around 11:30 a.m. because that is when volatility and volume tend to taper off.
What funds outperform the S&P 500? ›
10 funds that beat the S&P 500 by over 20% in 2023
| Fund | 2023 performance (%) | 5yr performance (%) |
|---|
| MS INVF US Insight | 52.26 | 34.65 |
| Sands Capital US Select Growth Fund | 51.3 | 76.97 |
| Natixis Loomis Sayles US Growth Equity | 49.56 | 111.67 |
| T. Rowe Price US Blue Chip Equity | 49.54 | 81.57 |
6 more rowsJan 4, 2024
Choosing your investments
Investing in an S&P 500 fund can instantly diversify your portfolio and is generally considered less risky. S&P 500 index funds or ETFs will track the performance of the S&P 500, which means when the S&P 500 does well, your investment will, too. (The opposite is also true, of course.)
Is Vanguard S&P 500 a good investment? ›
The Vanguard S&P 500 ETF (VOO -0.01%) is one of the best ways to invest in the S&P 500, which has been a pretty smart strategy over the long term. Since 1965, the S&P 500 has produced a total return of 10.2% annualized. The Vanguard ETF has an expense ratio of just 0.03%, so you get to keep most of your gains.
Can you retire with just index funds? ›
But that doesn't mean that you have to invest in individual stocks to build wealth in your retirement accounts. In fact, the exact opposite is true. It is entirely possible to build a retirement portfolio entirely out of index funds, and to build a large retirement nest egg.
Should I invest $10,000 in S&P 500? ›
Assuming an average annual return rate of about 10% (a typical historical average), a $10,000 investment in the S&P 500 could potentially grow to approximately $25,937 over 10 years.
Is it better to invest in an index fund or managed fund? ›
Because they don't require active management, the fees and the expense ratios of index funds tend to be lower, which means they can often outperform higher-cost funds, even without beating them. Still, they aren't without risk, and there are a few drawbacks.
Why is the S&P 500 a good long term investment? ›
1. Track Record of Success. One of the biggest draws of the S&P 500 and/or Nasdaq is its history of delivering solid returns over the long haul. Looking back, as we have done above, it's consistently outperformed more globally diversified markets, making it a favorite among investors, in the US at least for now.
