Invest in the S&P 500 (SNPINDEX: ^GSPC) It has historically been a great way for someone to grow their wealth. As a benchmark for the broader market, the index tracks 500 of the largest and most successful American companies.
While you cannot invest directly in the S&P 500, a series of exchange-traded funds (ETFs) track the index at low cost. And since these ETFs spread your money across hundreds of stocks, a bet on the S&P 500 can be a lower-risk way to invest in the stock market than picking individual stocks.
It may not always be possible to place a large lump sum into the stock market. However, if you receive an inheritance or profit from the sale of a home, you may be able to make a sizable investment, even if you haven’t built up a significant amount of savings.
Next, I’ll look at whether investing $50,000 in an S&P 500 index fund can pave the way for you to have $1 million by retirement, a goal many people have to live comfortably in their golden years.
For almost a century, the S&P 500’s compound annual return, including dividends, is 10.1%. But over the past 10 years, the index’s return has been an even more impressive 13.7%. While this is great news for investors who have invested during that time, the outlook for the next decade may not be so rosy.
Goldman Sachs Analysts, for example, project that the S&P 500 could generate only a 3% average annual return over the next 10 years due to high valuations and the resulting concentration of value in the index’s largest holdings. JPMorgan Analysts believe the index will generate an annual return of just 6% over the next decade.
Simply put, investing in the index today could mean significantly lower returns than investors have become accustomed to in recent history.
YCharts data.
But for someone early or mid-career, investing your retirement savings means thinking beyond the next decade. Therefore, even if the next five or ten years of index returns are relatively weak, the S&P 500 could still make up for those slow years with better returns in the future. There are too many factors that could influence the markets, making it almost impossible to predict exactly what the market will do many years from now.
Instead of trying to guess exactly what the S&P 500’s annual returns will be over the next decade and beyond, the table below illustrates what a $50,000 investment could be worth under different scenarios.
Projected value of a $50,000 investment today
S&P 500 Annualized Rate of Return
Year
3%
6%
8%
10%
10
$67,200
$89,500
$107,900
$129,700
20
$90,300
$160,400
$233,000
$336,400
25
$104,700
$214,600
$342,400
$541,700
30
$121,400
$287,200
$503,100
$872,500
35
$140,700
$384,300
$739,300
$1,405,100
40
$163,100
$514,300
$1,086,200
$2,263,000
Table and calculations by author. Amounts rounded to the nearest hundred.
The reality is that while a lump sum investment of $50,000 can be a significant amount of money, it will still take many years and a solid rate of return to grow to $1 million.
One way to help increase these numbers is by contributing to your holdings over time. Even if you can invest a large lump sum in the stock market today, periodically adding to your portfolio can be an effective way to help accelerate your profits.
You may look at the table above and think that the S&P 500 isn’t worth investing in if its returns may decline in the coming years. Or you may believe it’s better to prioritize other investments, such as growth stocks. Just remember that the potential for higher returns also means taking on more risk, and not everyone is comfortable with the added volatility that comes with that approach.
Meanwhile, betting on the S&P 500 offers immediate diversification and its focus on large, high-quality companies still makes it one of the most reliable ways to invest in the stock market. But even if you have $50,000 to start your journey, patience is necessary to give your investment the time it needs to grow into adequate savings.
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JPMorgan Chase is an advertising partner of Motley Fool Money. David Jagielski has no position in any of the stocks mentioned. The Motley Fool holds and recommends Goldman Sachs Group and JPMorgan Chase. The Motley Fool has a disclosure policy.
Is investing $50,000 in the S&P 500 today a sure-fire way to reach $1 million before retirement? was originally published by The Motley Fool
