Investing in the stock market can be intimidating, especially if you're a beginner. But it's simpler than it might seem, even if you have little to no investing experience.
Where you choose to invest is the most important decision you'll need to make. Fortunately, there are plenty of investments that are well-suited for beginners and those who simply want a no-fuss option.
While your investing choices are personal, there's one option that comes highly recommended by billionaire investor Warren Buffett: The S&P 500 index fund. Here's why it's such a fantastic investment, and how you could earn hundreds of thousands of dollars while barely lifting a finger.
Image source: The Motley Fool.
What is an S&P 500 index fund?
First, it's wise to know what, exactly, an S&P 500 index fund is and why it can make for a smart investment.
An index fund, in general, is a collection of stocks that follows a particular market index. An S&P 500 index fund, then, tracks the S&P 500(SNPINDEX: ^GSPC) and includes all the stocks within that index, mirroring its performance over time.
Whether you're new to the stock market or are just looking for a safer and more reliable investment, there are several advantages to investing in an S&P 500 index fund:
- Immediate diversification: By investing in just one S&P 500 index fund, you'll instantly own a stake in stocks from 500 companies across a wide variety of industries. Greater diversification can lower your risk, and investing in an index fund makes it nearly effortless to diversify your portfolio properly.
- A large collection of strong stocks: The S&P 500 itself only includes stocks from the largest and strongest corporations in the U.S. -- ranging from tech juggernauts like Apple and Microsoft to historic brands like Coca-Cola and Procter & Gamble. These companies are far more likely to survive periods of volatility, and when you're investing in hundreds of them at once, you can rest easier knowing your portfolio is more protected.
- A fantastic track record: The S&P 500 has existed for many decades, and in that time it's faced some of the worst crashes and recessions imaginable. Yet so far, it's recovered from every single one. While nobody can predict the future, it's extremely likely it will rebound from future slumps as well.
Research also suggests that as long as you're investing for at least a couple of decades, it's incredibly unlikely that you'll lose money.
Analysts at Crestmont Research studied the S&P 500's historic performance over 20-year periods, finding that every single one of those periods ended in positive total returns. In other words, if you'd invested in an S&P 500 index fund at any point in history and held it for 20 years -- no matter how volatile the market was in that time -- you'd have made money.
Earning Buffett's stamp of approval
All these advantages make the S&P 500 a reliable yet powerful investment -- so much so that it's often recommended by Warren Buffett.
"In my view, for most people, the best thing to do is to own the S&P 500 index fund," Buffett said during Berkshire Hathaway's 2020 annual meeting when discussing the ideal investment strategy for the average American. Through Berkshire Hathaway, he also owns two S&P 500 funds himself: The Vanguard S&P 500 ETF(NYSEMKT: VOO) and the SPDR S&P 500 ETF Trust(NYSEMKT: SPY).
In 2008, Buffett also famously bet $1 million that an S&P 500 index fund could beat a group of hedge funds over 10 years. The five hedge funds averaged returns of around 36% in that time, while Buffett's S&P 500 fund earned nearly 126% returns. Even the highest-earning hedge fund only earned total returns of just under 88% in total.
"Let me emphasize that there was nothing aberrational about stock market behavior over the ten-year stretch," Buffett later wrote of the experiment in an annual letter to shareholders.
He continued: "Seizing the opportunities then offered does not require great intelligence, a degree in economics or a familiarity with Wall Street jargon... What investors then need instead is an ability to both disregard mob fears or enthusiasms and to focus on a few simple fundamentals."
Building a portfolio worth hundreds of thousands of dollars
Like Buffett's experiment proved, staying invested for the long haul pays off. While the market can be volatile in the short term, investing regularly for at least a decade or two can help you earn significant returns.
Historically, the S&P 500 itself has earned an average rate of return of around 7% per year. Your returns will vary, of course, depending on how the market fares in the coming years. But let's say you're earning 7% average annual returns while investing $200 per month. Depending on how many years you invest, here's approximately how much you could earn:
| Number of Years | Total Portfolio Value |
|---|---|
| 10 | $33,000 |
| 20 | $98,000 |
| 30 | $227,000 |
| 40 | $479,000 |
Data source: Author's calculations via Investor.gov.
Reaching $227,000 in total savings will require investing for around 30 years, but if you're able to stay in the market just a little longer, you could earn exponentially more. The sooner you get started, then, the easier it will be to make a lot of money.
The S&P 500 index fund can be a powerful way to invest with minimal effort, and with its exceptional long-term track record, it's also a safer option than many other investments. By getting started investing now and staying in the market for the long haul, you could earn more than you might think.
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Katie Brockman has positions in Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Apple, Berkshire Hathaway, Microsoft, and Vanguard S&P 500 ETF. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
