Want to invest $1,000 in stocks? Invest the money in this index fund.

So you have $1,000 to invest. (Or maybe you only have $200. Or $50,000.) A good place to put that money 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: Stocks for the long termJeremy Siegel.

Image source: Getty Images.

Impressive, right? Of course, America in 1802 was a bit different than America in 2024, so you should know that the trend continues in more recent time periods. For example, over the 75 years between 1946 and 2021, stocks grew at an average annual rate of 11.3%, while long-term Treasury bonds grew only 5.8%. The lesson here is that stocks outperform bonds over most long periods of time.

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

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

The long-term average annual return on the S&P 500 is about 10 percent, so take a look at the table below, which shows you how much wealth you can build if your money grows by 10 percent—or more conservatively, 8 percent, since no return is guaranteed in the stock market and the market can be volatile, especially over shorter periods of time.

Data source: Author’s calculations.

I’m assuming annual investments of $10,000 because your $1,000 should only be the beginning. If you can save more than $10,000 annually, do it, and if you can only manage $2,000 or $5,000, invest that.

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 difficult to find very low annual fees (usually referred to as an “expense ratio”) — say, 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 per year.
• Even Warren Buffett loves index funds. In his will, he specified that most of the money he left to his wife should go into a low-cost S&P 500 index fund. He even made a 10-year million-dollar bet in favor of these funds – and won.
• Index funds outperform. Index funds tend to outperform their managed counterparts over long periods of time. Consider, for example, that the S&P 500 Index has outperformed a whopping 88% of managed large-cap mutual funds over the past 15 years, and 87% over the past decade, according to the folks at S&P Dow Jones Indices.
• Instant diversification: Once your money is in an S&P 500 index fund, it is spread across hundreds of companies – even the “Magnificent Seven”: Apple, MicrosoftGoogle parent company alphabet, Amazon.com, NVIDIAFacebook Parent Meta platforms, And TeslaThere are also many dividend-paying stocks, and the S&P 500 index recently had a dividend yield of 1.32%.

Here is a great S&P 500 index fund

Learn the Vanguard S&P 500 ETF (VOO 0.35%). Its expense ratio is minimal at just 0.03%. And it’s an exchange-traded fund (ETF), which is very similar to a mutual fund but trades like a stock.

To give you an idea of ​​what is included 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 are likely to see significant growth in the value of your investment over a long period of time.

So give this solid index fund serious consideration and add it to your portfolio. And know that there are other great index funds out there as well.