One of the most important investing decisions you’ll need to make is exactly where to put your money. Index funds are a great option for retirement because they’re a relatively safe choice that can limit your risk.
But can you retire a millionaire by investing in index funds? It’s possible, if you have a strategy in place.
Why invest in index funds?
Index funds are large collections of stocks that track a particular stock market index, such as the S&P 500 or the Dow Jones Industrial Average. Like any investment, there are pros and cons for index funds:
- They follow the market, so they’re more likely to rebound from market downturns.
- Because they contain hundreds or thousands of different stocks, they provide instant diversification.
- They typically charge lower fees than actively managed mutual funds.
- Index funds have historically outperformed actively managed mutual funds.
- By definition, they cannot beat the market and will only experience average returns.
- You cannot choose the stocks in the fund, so you could be stuck investing in stocks you wouldn’t normally choose.
- If the stock market as a whole experiences a downturn, index funds will fall as well.
- It typically takes decades to see significant growth.
Despite the downsides, index funds can be a great investment when saving for retirement. And if you start saving early enough, you may be able to retire a millionaire.
How to retire with $1 million or more
Because index funds offer slow but steady growth, you’ll ideally need to invest for several decades to accumulate $1 million. But if you save consistently, index funds can be a reliable way to build a healthy retirement fund.
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