Index funds are the easiest way to make money in the stock market. They require practically no effort. They are highly diversified (i.e., safe). And as it turns out, you’ll do better than nearly all people who pick stocks.
As simple smart investors, index funds are one of the best tools in our investing toolbox. In this post, my goal is to show you the data for index funds. I will break them down, so you know exactly what to expect from them.
Table of Contents
TL;DR
By investing in the S&P 500, you can expect a return of 10% a year. This means your money will double every 7 years.
What Is an Index Fund?
If you’re familiar with index funds, feel free to skip this part. Otherwise, I’ll give a brief basic explanation of index funds.
When you buy a stock, you are buying ownership in a company. When you buy something like the S&P 500, you are buying ownership in 500 U.S. companies.
When you own 500 companies, your investment is spread across many different industries. The advantage of this is “diversification.” You are not doomed by problems in any one industry, but you will not miss out on the growth of others either.
Here’s a shocking fact. While it is not obvious why, very few people — if any — can consistently beat index funds. So, as the saying goes: “If you can’t beat them, join them.”
S&P 500 – Returns
Now that we know what index funds are, let’s take a look at returns data. Starting with the S&P 500.
The S&P 500 is an index containing 500 U.S. companies. U.S. companies (like Apple, Microsoft, Amazon) are some of the biggest in the world. And they grow bigger every year.
So, it comes at no surprise that since 1985, the S&P 500 has grown by an average of 8.8% each year. Including a average yearly dividend of 2%, its total annual return has been about 10%.
Other Indices – Returns
Besides the S&P 500, there are many other index funds. To gain perspective, let’s take a look at several other popular ones. Here’s 10-year, 20-year, and 30-year growth data for them.
As you can see, not all index funds give the same return as the S&P 500. Generally, index funds from other developed economies give lower returns.
Compared to developed economies, however, emerging markets like India seem to offer opportunities for higher returns. Some exposure to emerging markets could be a good investing strategy.
My Two Cents
Index funds are probably the best “set and forget” investing tool available to us.
If you simply invest in the S&P 500, over a long period, you can expect a 10% annual return. This is what data tells us. Over the last 100 years, the S&P 500 has maintained a 10% annual return.
“But,” you might ask, “can past results really predict future performance?” This is a great question, one that I want to explore in a future post.
The bottom line is, you should strongly consider investing in an index fund like the S&P 500. But, as promising as the S&P 500 may be, you might still want to diversify.
Simple Smart Investing 
Leave a comment