This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
It's a common myth that the people who do well in the stock market are investing geniuses with a knack for choosing the right companies. Sure, having that talent could yield great results for your portfolio. But if it's not a skill you possess, fear not.
There's another investment option you can fall back on that could be your ticket to growing serious long-term wealth. And if you're not convinced, consider this: It's such a viable investment that even billionaire Warren Buffett is a fan.
Invest in the broad market
Warren Buffett has famously said that for everyday investors, putting money into an S&P 500 index fund is a solid bet. Now to be clear, it's not that Buffett himself needs to rely on index funds. Clearly, the man knows a thing or two about picking stocks, as evidenced by the billions of dollars he's managed to accrue in his lifetime. And so for him, choosing individual companies makes more sense.
Rather, Buffett feels that S&P 500 index funds are a great choice for people who may not know that much about vetting stocks, or who don't want to take on the risk of putting their money into the wrong companies. And that's why it pays to consider loading up on them.
If you're not familiar with index funds, they're passively managed funds whose goal is to match the performance of the benchmarks they're tied to. If you buy shares of an S&P 500 index fund, you'll effectively own a piece of 500 different companies.
That's a good thing, because it lends to diversification in your portfolio. And a diverse portfolio can help you minimize losses during periods of market turbulence and grow long-term wealth.
Just how much wealth are we talking? Since 1957, the S&P 500 has delivered an average yearly return of around 10.5%. This isn't to say that the index has done well every year since 1957. (Remember the Great Recession?) Rather, that 10.5% returns accounts for both strong years and weak ones.
Now, if you put $250 a month into an S&P 500 index fund over the next 40 years, you might enjoy that same return. And if so, you'll end up with a portfolio worth $1.5 million. That's not too shabby -- especially if you consider yourself someone who doesn't know all that much about picking stocks.
Learn from one of the greats
Warren Buffett has proven that he's more than capable of beating the market. But that doesn't mean that the average investor is equipped to do the same. That's why he recommends putting money into an S&P 500 index fund. And if you follow his advice, there's a good chance you'll end up pleased with the outcome.
Of course, if you’re confident in your ability to assemble a portfolio of stocks that can outperform the broad market, go for it. But if you’d rather play it a bit safer, then it definitely wouldn’t hurt to listen to the words of someone who clearly has a knack for growing wealth.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
