Can index funds make you rich?
Most fund managers and professional stock pickers don't beat the overall market anyway. It's unlikely amateur investors will fare consistently better. More than anything though, market indexes produce large-enough average returns to build real wealth for committed investors.
Index funds are a great investment for building wealth over the long-term. That's one reason they're popular with retirement investors.
Once you have $1 million in assets, you can look seriously at living entirely off the returns of a portfolio. After all, the S&P 500 alone averages 10% returns per year. Setting aside taxes and down-year investment portfolio management, a $1 million index fund could provide $100,000 annually.
Index funds involve passive investing, using a long-term strategy without actively picking securities or timing the market. Index funds should match the risk and return of the market based on the theory that, in the long term, the market will outperform any single investment.
Attractive returns: Like all stocks, major indexes will fluctuate. But over time indexes have made solid returns, such as the S&P 500's long-term record of about 10 percent annually. That doesn't mean index funds make money every year, but over long periods of time that's been the average return.
There are many ways to start investing, but one that's worked for billionaires like Warren Buffett is investing in low-cost index funds.
Start small and steadily grow your wealth using products and services like fractional shares, index funds, ETFs, retirement plans, brokerage accounts and robo-advisors. Alieza Durana joined NerdWallet as an investing basics writer in 2022.
Think About This: $10,000 invested in the S&P 500 at the beginning of 2000 would have grown to $32,527 over 20 years — an average return of 6.07% per year.
Because the goal of index funds is to mirror the same holdings of whatever index they track, they are naturally diversified and thus hold a lower risk than individual stock holdings. Market indexes tend to have a good track record, too.
Disadvantages of index funds. While index funds do have benefits, they also have drawbacks to understand before investing. An index fund tends to include both high- and low-performing stocks and bonds in the index it's tracking. Any returns you earn would be an average of them all.
Does Warren Buffett believe in index funds?
Buffett not only sees index funds as the simplest path to achieve a diversified portfolio, but they're also the cheapest. One of the biggest factors that drives down the performance of mutual funds are the fees investors have to pay. That's led 92% of active mutual funds to underperform the market over the long run.
Index fund | Minimum investment | Expense ratio |
---|---|---|
Invesco NASDAQ 100 ETF (QQQM) | No minimum | 0.15% |
Invesco QQQ (QQQ) | No minimum | 0.20% |
Fidelity NASDAQ Composite Index Fund (FNCMX) | No minimum | 0.34% |
Over the past 30 years, the S&P 500 index has delivered a compound average annual growth rate of 10.7% per year.
According to our calculations, a $1000 investment made in February 2014 would be worth $5,971.20, or a gain of 497.12%, as of February 5, 2024, and this return excludes dividends but includes price increases. Compare this to the S&P 500's rally of 178.17% and gold's return of 55.50% over the same time frame.
In fact, at the end of the five years, if you invest $1,000 per month you would have $83,156.62 in your investment account, according to the SIP calculator (assuming a yearly rate of return of 11.97% and quarterly compounding).
In 1980, had you invested a mere $1,000 in what went on to become the top-performing stock of S&P 500, then you would be sitting on a cool $1.2 million today.
Rank | Asset | Average Proportion of Total Wealth |
---|---|---|
1 | Primary and Secondary Homes | 32% |
2 | Equities | 18% |
3 | Commercial Property | 14% |
4 | Bonds | 12% |
If you're new to investing, you can absolutely start off by buying index funds alone as you learn more about how to choose the right stocks. But as your knowledge grows, you may want to branch out and add different companies to your portfolio that you feel align well with your personal risk tolerance and goals.
How long can you invest in index funds? Ideally, you should stay invested in equity index funds for the long run, i.e., at least 7 years. That is because investing in any equity instrument for the short-term is fraught with risks.
Investing $100 per month, with an average return rate of 10%, will yield $200,000 after 30 years. Due to compound interest, your investment will yield $535,000 after 40 years. These numbers can grow exponentially with an extra $100. If you make a monthly investment of $200, your 30-year yield will be close to $400,000.
How much money do I need to invest to make $1000 a month?
A stock portfolio focused on dividends can generate $1,000 per month or more in perpetual passive income, Mircea Iosif wrote on Medium. “For example, at a 4% dividend yield, you would need a portfolio worth $300,000.
Imagine you wish to amass $3000 monthly from your investments, amounting to $36,000 annually. If you park your funds in a savings account offering a 2% annual interest rate, you'd need to inject roughly $1.8 million into the account.
Years Invested | Balance At the End of the Period |
---|---|
10 | $102,422 |
20 | $379,684 |
30 | $1,130,244 |
40 | $3,162,040 |
Discount Rate | Present Value | Future Value |
---|---|---|
10% | $1,000 | $6,727.50 |
11% | $1,000 | $8,062.31 |
12% | $1,000 | $9,646.29 |
13% | $1,000 | $11,523.09 |
The result is the number of years, approximately, it'll take for your money to double. For example, if an investment scheme promises an 8% annual compounded rate of return, it will take approximately nine years (72 / 8 = 9) to double the invested money.
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