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Simple index funds that can help you save for retirement

Umito October 28, 2024

People can increase their wealth without having to be experts.

Bram Berkowitz
| The motley fool

Investing does not be complex. You don’t need to do hours and hours of research on individual names and try to find the next 10-bagger. Most experts would agree that if your time is limited and you can’t do the necessary research, choose variety.

Index Funds are a great way to get that diversity and a great place to invest for a long time and see your growth pile up nicely. Simply allocating a portion of your income each year to a few index funds will pay off big time. To want $1 million in retirement? Buy these two index funds and hold them for decades.

The S&P 500

THE S&P500 has enriched many people over the decades. The fund includes 500 large companies across many industries, and the S&P 500 is considered a bellwether for the U.S. stock market.

Although the criteria may change, publicly traded companies must currently have a market capitalization of more than $18 billion and have been publicly traded for at least one year (among other requirements) to be eligible. for the S&P 500. Here is a breakdown of the main sectors of the index as of September 30:

Information technology: 31.7%

Finance: 12.92%

Health: 11.61%

Discretionary consumption: 10.1%

Communication services: 8.86%

Industrial products: 8.51%

Consumer staples: 5.89%

Many people get rich by investing in the broader benchmark, the S&P 500. Legendary investor Warren Buffett, now 94, says the power of time has been one of the greatest contributors to its success. Let’s say you start investing in the S&P 500 in your 20s or early 30s, and then invest for 30 years. The S&P 500 delivered average annual returns of 10.7% over the past three decades.

If you could invest $5,000 in the index per year, at that rate you would have over $1 million after 30 years. That’s a lot to invest each year, but if you contributed every month, it would be a more manageable $416 per month.

And $5,000 is below the annual IRA and Roth IRA contribution limits, so you can invest in a retirement account and receive tax benefits when you deposit the funds or – with a Roth – when you make withdrawals as retirement approaches.

Worried the market is too high right now? Then try dollar cost averaging, in which you invest a fixed amount in the S&P 500 at regular intervals, which will smooth out your cost basis over time. An easy way to buy the S&P 500 Index is to use an exchange-traded fund such as SPDR S&P 500 ETF Trust (NYSEMKT: SPY).

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The S&P MidCap 400

Another good index fund to consider is the S&P MidCap 400, which, as the name suggests, contains mid-sized companies. According to S&P Global, the average market capitalization of an S&P MidCap 400 company is $6.7 billion, so it is much smaller than S&P 500 companies but larger than small caps.

The S&P MidCap 400 is more heavily weighted toward industrial, financial, and consumer discretionary stocks. Mid-cap stocks offer investors higher growth potential than large-cap stocks, without the same risk of small-cap stocks, which can fluctuate more wildly with interest rates and the economy. Since 1995, the S&P MidCap 400 has outperformed the S&P 500 and the S&P SmallCap 600, generating an annualized total return of nearly 12%.

Exchange-traded funds tracking the S&P MidCap 400 such as Vanguard S&P Mid-Cap 400 ETF (NYSEMKT:IVOO) have a beta version of 1.2. Beta shows how risky a stock or ETF is relative to the market as a whole. For example, the S&P 500 has a beta of 1, and stocks or ETFs with a beta greater than 1 will have more volatility than the market as a whole.

A beta of 1.2 provides more upside potential when the market is moving higher, but also more downside potential when the market is struggling. Exposure to riskier assets can help you keep pace with inflation over time.

Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has no position in any of the securities mentioned. The Motley Fool has a disclosure policy.

The Motley Fool is a content partner of USA TODAY providing financial news, analysis and commentary designed to help people take control of their financial lives. Its content is produced independently of USA TODAY.

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