Got $1,000 to invest in stocks? Put it in this index fund.

So you have $1,000 to invest. (Or maybe you only have $200. Or $50,000.) A good place to park that moolah, if you want it to grow significantly over many years, is the stock market. Check out these average annual returns from Wharton Business School professor Jeremy Siegel.

Data source: Long term stocksJeremy Siegel.

Image source: Getty Images.

Impressive, right? Of course, the America of 1802 was a little different from the America of 2024, so you know the trend continues into more recent times. For example, in the 75 years between 1946 and 2021, stocks grew at an average annual rate of 11.3%, compared to 5.8% for long-term government bonds. The lesson here is that stocks outperform bonds over most long periods.

Where to invest your $1,000: A simple index fund

So how, exactly, should you invest in the stock market with $1,000 (or whatever amount you have)? Well, a simple, low-fee index fund is a good choice — perhaps one that tracks the performance of the S&P 500 index of 500 of America’s largest companies.

The S&P 500’s long-term average annual return is about 10%, so check out the chart below that shows how much wealth you could build if your money grows by 10% — or a more conservative 8% because there are no actions. market returns are guaranteed and the market can be volatile, especially over shorter periods.

Data source: calculations by author.

I use $10,000 annual investments because $1,000 should be just a start. If you can put away more than $10,000 annually, go for it, and if you can only manage $2,000 or $5,000, invest it.

Why index funds?

Here are some reasons why you might prefer index funds:

• Low fees: There are many different index funds that track the S&P 500 and other indexes. Some charge higher fees than others, but it’s generally not hard to find very low annual fees (commonly called “expense ratios”) – like 0.10% or less per year. If you invest $10,000 in an index fund with an expense ratio of 0.10%, you’ll only pay about $10 in fees for the year.
• Even Warren Buffett loves index funds. He stipulated in his will that most of the money he leaves to his wife should go into a low-fee S&P 500 index fund. He even made a 10-year, million-dollar bet in their favor — and won.
• Index funds outperform. Index funds tend to outperform their managed counterparts over long periods. Consider, for example, that according to the folks at S&P Dow Jones Indices, over the past 15 years, the S&P 500 has outperformed a staggering 88% of the large-cap mutual funds under management, and has outperformed 87% over the past decade .
• Instant diversification: Once your money is in an S&P 500 index fund, it’s spread across hundreds of companies — including the Magnificent Seven: Apple, MicrosoftGoogle parent Alphabet, Amazon.com, NvidiaFacebook parent meta platforms, and adze. There are also plenty of dividend-paying stocks, and the S&P 500 recently posted a dividend yield of 1.32%.

Here’s a great S&P 500 index fund

Meet the Vanguard S&P 500 ETF (VOO 0.35%). Its expense ratio is minuscule, at just 0.03%. And it’s an exchange-traded fund (ETF) — which looks a lot like a mutual fund, but trades like a stock.

To give you an idea of ​​what’s in the ETF, here are the recent top components of the S&P 500:

Source: Slickcharts.com.

The table below shows that this ETF (and other low-fee index funds that track the S&P 500) tend to perform quite well:

Data source: Morningstar.com.

If you invest in the Vanguard S&P 500 ETF, you may see your investment grow substantially over a long period of time.

So give this solid index fund serious consideration for a spot in your portfolio. And know that there are other great index funds out there.