Can you get wealthy with index funds?
Yes, it is possible to accumulate wealth by consistently saving and investing in index funds over a long period of time. Index funds offer broad market exposure and historically have shown steady growth over the long term.
Index funds are a great investment for building wealth over the long-term. That's one reason they're popular with retirement investors.
Nearly 57% of active U.S. equity funds survived and beat their average index peer over the 12 months through June 2023. Active U.S. small-cap funds succeeded at a better clip (65%) than large caps (53%), but it was a balanced effort: Eight of the nine U.S. stock categories posted active success rates higher than 50%.
| Number of Years | Growth of $5,000 Per Year at 9.9% Returns |
|---|---|
| 15 | $157,608 |
| 20 | $283,143 |
| 30 | $807,057 |
| 40 | $2,153,652 |
Well, the number is $4,882 a month. So if you can start today and you can save $4,882 every month for the next 120 months and you can annualize 10% on your portfolio at the end of 10 years, you will have a million dollars in invested assets.
Even the top investors put their money in index funds.
Billionaires like Warren Buffett, Ray Dalio, Bill Ackman, and Ken Griffin have made their fortune by getting others to invest with them and making smart investments.
The short answer is a resounding yes. Let's take a look at why this is. While past investment performance doesn't guarantee future results, the return of S&P 500 index funds has been about 9% to 10% annualized per year over long periods, depending on the exact timeframe you're looking at.
Over the past 30 years, the S&P 500 index has delivered a compound average annual growth rate of 10.7% per year. Data source: Slickcharts.com.
Index fund risks
In the case of a stock index fund, for example, every stock would have to go to zero for the index fund, and thus the investor, to lose everything. So while it's theoretically possible to lose everything, it doesn't happen for standard funds.
While indexes may be low cost and diversified, they prevent seizing opportunities elsewhere. Moreover, indexes do not provide protection from market corrections and crashes when an investor has a lot of exposure to stock index funds.
What if I invested $1000 in S&P 500 10 years ago?
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.
The truth is that most investors won't have the money to generate $1,000 per month in dividends; not at first, anyway. Even if you find a market-beating series of investments that average 3% annual yield, you would still need $400,000 in up-front capital to hit your targets. And that's okay.
Some experts recommend withdrawing 4% each year from your retirement accounts. To generate $500 a month, you might need to build your investments to $150,000. Taking out 4% each year would amount to $6,000, which comes to $500 a month.
Suppose you're starting from scratch and have no savings. You'd need to invest around $13,000 per month to save a million dollars in five years, assuming a 7% annual rate of return and 3% inflation rate. For a rate of return of 5%, you'd need to save around $14,700 per month.
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.
But the truth is you can get a 9.5% yield today--and even more. But even at 9.5%, we're talking about a middle-class income of $4,000 per month on an investment of just a touch over $500K.
In 2007, Buffett bet a million dollars that over the course of a decade, a simple S&P 500 index fund would outperform a basket of hand-picked hedge funds. He picked the Vanguard 500 Index Fund Admiral Shares (VFIAX). Hedge fund manager Ted Seides from Protégé Partners accepted the bet and picked five funds-of-funds.
Ultra-wealthy individuals invest in such assets as private and commercial real estate, land, gold, and even artwork. Real estate continues to be a popular asset class in their portfolios to balance out the volatility of stocks.
One of the main reasons is that some investors believe they can outperform the market by actively selecting individual stocks or actively managed funds. While this is possible, it is not easy, and many studies have shown that the majority of active investors fail to beat the market consistently over the long term.
While there are few certainties in the financial world, there's virtually no chance that an index fund will ever lose all of its value. One reason for this is that most index funds are highly diversified. They buy and hold identical weights of each stock in an index, such as the S&P 500.
At what age can you retire with $1 million dollars?
Retiring at 65 with $1 million is entirely possible. Suppose you need your retirement savings to last for 15 years. Using this figure, your $1 million would provide you with just over $66,000 annually. Should you need it to last a bit longer, say 25 years, you will have $40,000 a year to play with.
There are hundreds of funds, tracking many sectors of the market and assets including bonds and commodities, in addition to stocks. Index funds have no contribution limits, withdrawal restrictions or requirements to withdraw funds.
In 1980, had you invested a mere $1,000 in what went on to become the top-performing stock of S&P 500 (^GSPC 0.63%), then you would be sitting on a cool $1.2 million today. That equates to a total return of 120,936%. The stock? None other than Gap (GPS 4.66%).
According to Standard and Poor's, the average annualized return of the S&P index, which later became the S&P 500, from 1926 to 2020 was 10%. 1 At 10%, you could double your initial investment every seven years (72 divided by 10).
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.
