What is Index fund?
An index fund is a mutual fund or exchange-traded fund designed to follow certain index (such as S&P) so that the fund can track a specified basket of underlying investments.
Where to find S&P index fund?
You can easily find S&P index fund on the market: Fidelity S&P 500, Schwab S&P 500, Vanguard 500, T. Rowe Price equity index 500 etc.
Why index fund?
There are several reasons I choose index fund. It is low-cost (as little as 0.03%). It allows us to diversify with limited capital. And the biggest reason: it provides good return on investment.
What kind of return can we expect for S&P index fund?
Over the long run, the S&P 500 has generated total returns of about 10% annually. Over the past 50 years, the index has gained 30% or more in nine separate years, despite losing 37% in a single year.
If you put $10,000 into an S&P index fund in 1980 (38 years ago), S&P 500 index has generated a total return of approximately 7,670% in 2018. On average, that is 12.1% return on investment per annum.
Let’s assume the fees of the index fund that you choose is 0.1%, your $10,000 38 years ago would be around $760,000 in 2018. And you do not need to worry about picking the wrong stocks.
Note: Warren Buffett has said in the shareholder letters (more than once) that an S&P 500 index fund is the best investment most Americans can make. He even mentioned that he wants his own wife’s money invested in such a fund after he’s gone.
S&P index performance in history
In the recent 55 years (1956–2019), the total return on investment is 315 times. On average, it gives a 11% annualised return.
In the recent 30 years (1990–2019), the total return on investment is 17 times. On average, it gives a 10% annualised return.
In the recent 20 years (2000–2019), the total return on investment is 3.2 times. On average, it gives a 6.1% annualised return.
In the recent 10 years (2010–2019), the total return on investment is 3.6 times. On average, it gives a 13.6% annualised return.
As S&P index funds tracks the S&P performance, we can expect an average annual return of 10–11% over long term.
Note: this is not investment advice. I’m not a financial planning professional. Just sharing what is working for me as part of my investing strategy or what I have learnt on my investment journey. Please be reminded to do your own research and consider your own circumstances before making any financial decisions. You could also check with your financial professional to understand what would be best for your situation.
