How do you turn $25,000 into $20,635,655? While investors are always looking for a shortcut, the answer is a combination of two factors: Time and my favorite index fund of all time.
This index fund is critical for building long-term wealth
If you put $25,000 into an index fund tracking the S&P 500 index (^GSPC -0.48%) in 1960, you would have north of $20 million today without ever investing another cent apart from reinvesting your dividends.
Today’s Change
(-0.48%) -37.00
Index Level
7,619.98
Key Data Points
Day’s Range
7,592.28 – 7,647.99
52wk Range
6,316.91 – 7,816.70
That’s it. This strategy involved no trading in and out of individual stocks. It doesn’t rely on market timing or predicting the next economic cycle. It doesn’t even require forecasting inflation rates, political parties, or geopolitical events. All that’s needed is time, and thus, plenty of patience.
Image source: Getty Images.
Especially in today’s environment, investors are inundated with investment advice and new investment vehicles. It sometimes seems like ETFs and mutual funds are tracking nearly every inclination. But as this simple example proves, none of those options have been necessary historically to amass long-term wealth.
In fact, many alternative investment vehicles come with high fees and elevated tax bills due to short-term trading. Index funds tracking the S&P 500, meanwhile, experience very little annual turnover. That is, these index funds only trade in and out of stocks when the underlying index changes, which isn’t very often.
Historical market cycles have also shown that the most important thing an investor can do isn’t picking the right stocks, but putting more money to work. Buying an ETF tracking the S&P 500 allows investors to do this with minimal thought, fees, and extra steps. The Vanguard S&P 500 ETF (VOO -0.46%), for example, charges just 0.03% per year in fees — nearly as low as it gets. This ETF also allows for regular purchases as low as $1. Investors, therefore, can start automatically buying more stock for just $1 per day.
In a world where complex investment strategies are everywhere, simply sticking with a broad market index fund for decades at a time remains an elite approach to building wealth.
Ryan Vanzo 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.