A friend of mine recently started funding an IRA for retirement savings purposes. And one of the first questions he had for me was, “What investments should I choose?”
It wasn’t the easiest question to answer. See, my personal portfolio consists of a large variety of stocks. But those are stocks I’ve chosen for different reasons. And just because those are the right stocks for me doesn’t mean they’re the right stocks for my friend, or someone else.
So instead of telling my friend to simply copy my list of stocks, I reassured him that he’s not alone in feeling like he’s in the dark when it comes to investing money. Many people aren’t well-versed in researching stocks, and many don’t know what metrics to look at.
That’s why I told my friend his best bet may be to load his portfolio with S&P 500 ETFs. And if you’re not sure how to invest your money, you may want to do the same.
When you fall back on the broad market
Exchange-traded funds (ETFs) tend to be a good choice for people who are new to investing. You’ll often hear that it’s important to maintain a diversified portfolio at all times. With ETFs, you’re buying a bucket of stocks instead of shares of individual companies. That makes it so you’re not putting all of your eggs into a single basket.
Meanwhile, the reason I’m a fan of S&P 500 ETFs is that they really allow you to diversify nicely. The S&P 500 index is commonly used as a benchmark for tracking the stock market’s performance. In fact, when you hear on the news that the stock market was up or down, often, the person saying that is referring to the value of the S&P 500 index.
If you buy shares of an S&P 500 ETF, you’re effectively investing in the 500 largest publicly traded companies. That should give you some comfort, because if some of those companies lose value, others might gain value to compensate, thereby sparing you from significant losses. Also, you’re generally investing in established companies, which may inherently carry less risk.
How much wealth can you grow with S&P 500 ETFs?
Over the past 50 years, the S&P 500 has rewarded investors with an average annual return of 10%. So let’s say you invest $250 a month over 40 years. If you can score that same return, you could end up with over $1.3 million to your name. All told, you’re looking at gains of well over $1 million (because $250 a month x 12 months x 40 is only $120,000 of your own money going into your account).
You do not have to be an expert in investing to do well in the stock market. If you load your portfolio with S&P 500 ETFs, you can take a lot of the guesswork out of investing, all the while potentially setting yourself up with a lot of wealth.
Now to be fair, investing in individual stocks could result in a return that’s greater than what the S&P 500 itself delivers. But if you’re not willing to do the work involved in learning how to research stocks, or you feel that it’s too overwhelming, know that there’s nothing wrong with sticking to a strategy that basically has you investing in the broad market.
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