People can grow their wealth without having to be experts.
Bram Berkowitz
The Motley Fool
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
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.
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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).
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The S&P MidCap 400
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.
The S&P MidCap 400 is more heavily weighted with industrial, financial, and consumer discretionary stocks. Mid-cap stocks offer investors higher growth potential than larger-cap stocks without the same risk as small-cap stocks, which can swing more wildly with interest rates and the economy. Since 1995, the S&P MidCap 400 has outperformed both the S&P 500 and the S&P SmallCap 600, generating an annualized total return of close to 12%.
Exchange-traded funds tracking the S&P MidCap 400 such as the Vanguard S&P Mid-Cap 400 ETF (NYSEMKT: IVOO) have a beta of 1.2. The beta shows how risky a stock or ETF is compared to the broader market. For instance, the S&P 500 has a beta of 1, and stocks or ETFs with betas over 1 will have more volatility than the broader market.
A beta of 1.2 provides more upside when the market is moving higher but also more downside when the market struggles. Getting exposure to riskier assets can help you keep pace with inflation over time.
Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
The Motley Fool is a USA TODAY content partner offering financial news, analysis and commentary designed to help people take control of their financial lives. Its content is produced independently of USA TODAY.
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