It's been said that Warren Buffett, upon his death, recommends that his wife invest her entire inheritance in an S&P 500 index fund. This is with good reason: the S&P 500 represents a collection of America's largest companies, and most ETFs tracking the index are automatically rebalanced and nearly free of charge. The question of whether the S&P 500 is enough to retire a millionaire is best answered in two parts: first, is it all you need? And second, is it optimal? Regardless of where your answers fall, it's easy to make the argument that an S&P 500 index fund should be a core part of your accumulation portfolio.
What's enough, anyway?
For the last 25 years, the S&P has repeatedly proven its ability to grow steadily. As the below chart depicts, this is not without major bumps in the road -- most recently in 2000, 2008 and 2020. A long-term investor would have seen robust gains over this time period assuming he or she reinvested dividends, and perhaps more importantly, never traded in and out of the market.
Assuming a 10% average annual return from the S&P 500 alone and a time horizon of 30 years, investing $446 at the end of every month would leave you with a million dollars for retirement. For many retirees, this is well more than enough, especially when combined with Social Security and a decision to live in a lower cost of living area. In truth, only you can determine how much is enough, but diligent saving paired with a 10% annual return should get you to millionaire status within 30 years.
SPY Total Return Level data by YCharts
If the question is whether or not a portfolio containing only an S&P 500 index fund from Vanguard (VOO 0.14%) would be enough to fund a retirement, the answer is yes. The real key, however, has more to do with the behavior of the individual than that of the index. For this to work, the prospective retiree must invest at regular intervals, set dividends to reinvest, and not trade in and out of their position. If you're willing to commit to such a strategy, it's highly likely that your portfolio at retirement will be more than enough to cover your living expenses.
So it's enough. Is it optimal?
Investing solely in the S&P 500 is a very good way to become a millionaire over a multi-decade time horizon. It's also important to think about what could go wrong, or what may be left out:
- There is no guarantee that 21st century America will experience the same growth that 20th century America did. As we've seen over the past several months and years, we are a deeply divided country that has difficulty managing crises. Further, climate change stands as an existential threat that will in all likelihood impact the world's ability to advance as it once did.
- You need to have nerves of steel when it comes to volatility. The market has the ability to go up -- and a strong historical record of doing so -- but it also has a similar ability to fall precipitously. If you wouldn't like to see your investments drop by 30-50% in a single year (or month!) and might be tempted to sell out if such a drop were to occur, adding some conservative investments, like corporate or municipal bond funds, may help to smooth the ride.
- Investing in the S&P 500, if you're American, carries a home bias. As it turns out, there's a big world out there! Many international funds, such as Vanguard's All-World ex-U.S. Fund (VFWAX -0.28%), will provide exposure to overseas companies with entirely different risk exposures. Adding an international funds -- whether developing or emerging -- will help to diversify your portfolio even further.
Image Source: Getty Images.
A strong choice, but plan accordingly
It's likely that a monthly investment in an S&P 500 index fund will prove to be a good investment over time. However, good financial planning suggests that you also maintain reasonable levels of liquidity (cash reserves) and properly diversify your investment risk on a global level. With all of this said, an S&P 500 index fund is a strong long-term choice for even the most novice investor all the way through to the experienced financial professional.
