Getting rich from an S&P 500 index fund isn't quite as glamorous as picking a 10-bagger stock. But the beauty of the S&P 500 index is that it can make anyone wealthy. There's no skill, expertise, or luck required.
Can the S&P 500 make you a millionaire? Here's what history says
The S&P 500 index is a collection of 503 stocks that represent roughly 80% of the U.S. stock market's value. The index has strict criteria for inclusion to ensure that only the most stable, profitable publicly traded domestic companies are represented. For example, any new additions to the index must have a market capitalization of at least $14.6 billion as of March 2022 and positive earnings for the previous four quarters combined.
Image source: Getty Images.
Though you can't invest directly in the S&P 500 index, you can invest in an S&P 500 index fund, like the Vanguard S&P 500 ETF (NYSEMKT: VOO) or the iShares S&P 500 Core ETF (NYSEMKT: IVV). These funds closely mirror the index's performance.
In the 40 years between March 1983 and March 2023, the S&P 500 index has had an average annualized return of 10.25%, assuming dividend reinvestment. That may not sound like much for those who are seeking to get rich quick. But for those who are willing to invest consistently over the long run, compounding can turn small, regular investments in an S&P 500 index fund into serious wealth.
Here's how a 10.25% return would break down if you invested $5,000 at the beginning of each year over four decades.
| Time Frame | Value |
|---|---|
| Five years | $33,822 |
| 10 years | $88,915 |
| 15 years | $178,655 |
| 20 years | $324,833 |
| 25 years | $562,941 |
| 30 years | $950,795 |
| 35 years | $1,582,567 |
| 40 years | $2,611,657 |
Data source: Author's calculations.
As you can see from the chart, investing $5,000 annually in the S&P 500 would make you a millionaire in a little over 30 years, assuming average 10.25% annual returns.
Can't the S&P 500 lose money?
As with any investment, S&P 500 index funds carry the risk of losing money, particularly in the short term. In 2022, for instance, the S&P 500 fell by more than 18%. But historically, the S&P 500 has always recovered from its losses.
Between 1950 and 2022, the S&P 500 delivered positive returns 74% of the time for a one-year holding period, according to research by MFS Investment Management. But the odds of success increase over longer time stretches. Returns were positive 83% of the time for five-year holding periods and for 92% of all 10-year holding periods. And for a 20-year investment, returns have been 100% positive.
But given the possibility for short-term stock market volatility, you should only invest in an S&P 500 index fund if you don't expect that you'll need your money for around five years. Money you need before that is better stashed in a savings account or certificate of deposit (CD), or a safe investment like Treasury bills.
Should an S&P 500 fund be your only investment?
An S&P 500 index fund matches the growth of most of the U.S. stock market, which has always trended upward given sufficient time. The S&P 500 also offers instant diversification, since your money gets invested in 503 different stocks across all 11 stock market sectors.
But you typically don't want to be 100% invested in stocks, particularly as you get closer to retirement. Because of the possibility of short-term losses, it's wise to start shifting some of your money to safer investments, like bonds, when retirement is on the horizon. Some investors also prefer to diversify their stock holdings beyond the S&P 500 by adding small-cap and international stocks.
Finally, if there are specific companies or industries that you're knowledgeable about, you may want to add individual stocks and exchange-traded funds (ETFs) to the mix.
An S&P 500 index fund alone can absolutely achieve the growth needed to make you into a millionaire. But you probably don't want that to be your sole investment, particularly when you're close to retirement.
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Robin Hartill, CFP® has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
