It’s a common myth that people who do well in the stock market are investment geniuses with a knack for picking the right companies. Sure, having that talent could lead to great results for your portfolio. But if it’s not a skill you possess, fear not.
There is another investment option you can turn to that could be your ticket to increasing your long-term wealth. And if you’re not convinced, consider this: It’s such a viable investment that even the billionaire Warren Buffet is a fan
Invest in the broad market
Warren Buffett has famously said that for everyday investors, putting money into a S&P 500 index fund it’s a solid bet. Now, just to be clear, it’s not like Buffett himself should rely on index funds. Clearly, the man knows a thing or two about stock picking, as evidenced by the billions of dollars he’s managed to amass in his lifetime. So for him, choosing individual companies makes more sense.
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Rather, Buffett feels that S&P 500 index funds are a great option for people who may not know much about stock research, or who don’t want to risk putting their money in the wrong companies. And that’s why it’s worth considering charging them.
If you’re not familiar with index funds, they are passively managed funds whose goal is to match the performance of the benchmarks they are tied to. If you buy shares of an S&P 500 index fund, you will effectively own a piece of 500 different companies.
That’s a good thing, because it lends itself to diversifying your portfolio. And a diverse portfolio can help you minimize losses during periods of market turbulence and increase your long-term wealth.
How much wealth are we talking about? Since 1957, the S&P 500 has generated an average annual return of about 10.5%. This is not to say that the index has done well every year since 1957. (Remember the Great Recession?) Rather, that 10.5% return represents both the strong and weak years.
Now, if you invest $250 a month in an S&P 500 index fund for the next 40 years, you could enjoy the same returns. And if so, you’ll end up with a portfolio valued at $1.5 million. That’s not bad at all, especially if you consider yourself someone who doesn’t know much about stock picking.
Learn from one of the greats
Warren Buffett has shown that he is more than capable of beating the market. But that doesn’t mean the average investor is equipped to do the same. That’s why he recommends putting money in an S&P 500 index fund. And if he follows his advice, he’s likely to be satisfied with the outcome.
Of course, if you’re confident in your ability to build a stock portfolio that can outperform the broader market, go for it. But if you prefer to play it a little safer, it definitely wouldn’t hurt to hear the words of someone who clearly has a knack for building wealth.
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