It may seem like your best bet, but there's more to the story.
The money you work hard to set aside for retirement shouldn't just sit in cash. It's important to invest that money so it grows at a fast enough clip to outpace inflation and provide you with the buying power you need later in life.
When it comes to investing your retirement savings, you have choices. Some people opt to assemble a portfolio of hand-picked stocks, while others might opt to fall back on an S&P 500 index fund.
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If you go the latter route, don't assume you're making a mistake. Investing legend Warren Buffett has said many times over that the typical saver can do quite well by investing in an S&P 500 index fund. But is that the best option for you?
It's a matter of effort and knowledge
If you're not familiar with index funds, they're passively managed funds that aim to match the performance of the market benchmarks they're associated with. An S&P 500 index fund is designed to mimic the performance of the S&P 500 itself, which consists of the 500 largest publicly traded companies today.
The nice thing about investing in an S&P 500 index fund is that you're getting instant diversification in your portfolio. The passive nature of index funds also tends to make them available to investors without the high fees that are commonly associated with actively managed mutual funds.
If you're someone who doesn't have the time or knowledge to hand-pick a portfolio of stocks, then you may decide to fall back on an S&P 500 index fund for your retirement portfolio. And there's really nothing wrong with that.
However, if you do have some investing knowledge and you are willing to do the work, you may find that your portfolio is able to outperform the S&P 500 through the years. The result? A higher retirement plan balance.
Be honest with yourself
Some people start saving for retirement with zero investing knowledge and grow their stock-picking skills over time. As such, one thing you may want to do is begin by investing in an S&P 500 index fund, but then eventually grow your portfolio as you learn more about how to pick stocks yourself.
But at the end of the day, your approach to investing for retirement should really boil down to the work you're willing to put in. Even if you know a thing or two about hand-picking stocks, if you're not willing to keep tabs on your portfolio, an S&P 500 index fund may be a better bet. But if you're confident you'll be able to carve out the time to continuously research stocks and keep track of the ones you own, then hand-picking investments could make it possible to beat the S&P 500.
Of course, falling back on the S&P 500 could still prove to be quite rewarding. Over the past 50 years, the index has averaged an annual 10% return. This means that if you were to invest $300 a month in an S&P 500 index fund over 40 years, at that return, you'd end up with almost $1.6 million. So while it may be possible to do better with a portfolio you put together yourself, know that you're not exactly doomed if you decide you just aren't up to the task.
FAQs
Investing in a broad market index fund can take a lot of the guesswork away. If you're not a confident investor, an S&P 500 index fund could be your best choice. If you're willing to do the work and research stocks individually, you might enjoy stronger gains in your retirement account.
Is an S and P 500 index a good investment? ›
Index funds are fairly inexpensive compared with other types of mutual funds, making them an attractive option for most investors. S&P 500 index funds can help you instantly diversify your portfolio by providing exposure to some of the biggest companies in the U.S.
What is the best performing S&P 500 index fund? ›
Our recommendation for the best overall S&P 500 index fund is the Fidelity 500 Index Fund. With a 0.015% expense ratio, it's the cheapest on our list. And it doesn't have a minimum initial investment requirement, sales loads or trading fees. Over the last 10 years, FXAIX has returned an annualized 12.82%.
Should I invest in index funds for retirement? ›
Potential benefits of index investing
Over the long run, that means you may be able to keep more of your earnings. By investing more broadly instead of picking individual stocks to bet on, index funds can give you more exposure and help spread your risk around.
What if I invested $1000 in S&P 500 10 years ago? ›
So imagine you put $1,000 into either fund 10 years ago. You'd be up to roughly $3,282 with VOO or $3,302 from SPY. That's not exactly wealthy, but it shows how you can more than triple your money by holding an asset with relatively low long-term risk.
Should I put my 401k into S&P 500? ›
You can use the money you deposit into the brokerage account to purchase S&P 500 stocks or funds, which will then be held within that account. If your ultimate goal is investing for retirement, consider investing in the S&P 500 through a 401(k) or IRA, rather than a taxable brokerage account.
Why you shouldn't just invest in the S&P 500? ›
Lack of Global Diversification
The S&P 500 is all US-domiciled companies that over the last ~40 years have accounted for ~50% of all global stocks. By just owning the S&P 500 you miss out on almost half of the global opportunity set which is another ~10,000 public companies.
Is there a better investment than the S&P 500? ›
If you want to invest successfully, one of your best options is to stick with the S&P 500. But what if you want even more growth? The Vanguard Small-Cap ETF (NYSEMKT: VB) could be your best bet.
Should I invest $10,000 in S&P 500? ›
Assuming an average annual return rate of about 10% (a typical historical average), a $10,000 investment in the S&P 500 could potentially grow to approximately $25,937 over 10 years.
Where is the best place to buy S&P 500 Index Fund? ›
Open an investment account: Select a reputable brokerage platform that offers access to the S&P 500. Companies such as Schwab, Fidelity or Vanguard offer their own proprietary S&P 500 index funds, as do many others. Create an account, complete the necessary paperwork and fund your account to begin investing.
10 funds that beat the S&P 500 by over 20% in 2023
| Fund | 2023 performance (%) | 3yr performance (%) |
|---|
| MS INVF US Insight | 52.26 | -47.18 |
| Sands Capital US Select Growth Fund | 51.3 | -20.88 |
| Natixis Loomis Sayles US Growth Equity | 49.56 | 26.07 |
| T. Rowe Price US Blue Chip Equity | 49.54 | 5.81 |
6 more rowsJan 4, 2024
How to invest in the S&P 500. The easiest and most efficient way to invest in the S&P 500 is via a low-cost exchange-traded fund (ETF). Several ETFs track the S&P 500, but the oldest and most popular is the SPDR S&P 500 ETF Trust (SPY).
What are 2 cons to investing in index funds? ›
Disadvantages of Index Investing
- Lack of downside protection: There is no floor to losses.
- No choice in the index fund's composition: Cannot add or remove any holdings.
- Can't beat the market: Can only achieve market returns (generally)
At age 60–69, consider a moderate portfolio (60% stock, 35% bonds, 5% cash/cash investments); 70–79, moderately conservative (40% stock, 50% bonds, 10% cash/cash investments); 80 and above, conservative (20% stock, 50% bonds, 30% cash/cash investments).
Is now a good time to invest in the S&P 500? ›
S&P 500 Index
The market is surging, but is now really the best time to buy? The S&P 500 (^GSPC -1.73%) has been booming over the past year and a half, currently up by nearly 50% from its low in late 2022. The index has also reached two dozen all-time highs throughout 2024, its most recent in late May.
Which pension funds are performing the best? ›
Ten best-performing pension funds
| Fund | 3 yrs (%) |
|---|
| AXA Wealth Jupiter UK Growth | 56.35 |
| FL Jupiter Distribution AP | 24.78 |
| FL Jupiter Distribution EP | 23.98 |
| Scottish Widows Jupiter Distribution | 23.22 |
6 more rowsAs a starting point, some experts suggest the 70pc rule, where you aim for 70pc of your current salary as a retirement income. Another option is to aim to build a pot that is 10 times your annual salary.
How to invest in the S&P 500 for retirement? ›
The most people who invest in the S&P 500 do so through index funds, which are mutual funds or exchange-traded funds that aim to replicate the benchmark's performance. Most employer-sponsored retirement accounts—like 401(k)s or 403(b)s—offer at least one S&P 500 index fund.
What is the ideal retirement fund? ›
By age 35, aim to save one to one-and-a-half times your current salary for retirement. By age 50, that goal is three-and-a-half to six times your salary. By age 60, your retirement savings goal may be six to 11-times your salary. Ranges increase with age to account for a wide variety of incomes and situations.
