Index funds are great. They offer the opportunity to become adequately diversified with a single purchase and are great for new investors to gain exposure to the stock market.
Statistics show just how much they have grown in popularity over the last two decades, from $26 billion in new cash flow to index mutual funds in ’00 to a record of $223b in ’17 and $128b in ’19 (source, page 73.) That’s a whopping 400% increase!
But investing isn’t a popularity contest. At one point, in the mid-1960s, around 40% of adult Americans smoked cigarettes, so popularity in itself probably isn’t a good measurement of if something is good or not.
So the question still remains, can you get rich off index funds? It’s not an easily answered question since it depends on a myriad of factors like:
- What you consider rich
- Where you live
- How much you invest
- How the index funds will perform
If you were looking for a quick answer, I am sorry, it isn’t possible to give you an honest quick answer to this question. But I promise that you’ll have a general idea of how realistic it is before the end of this article.
So what are we waiting for? Let’s get going.
Can You Get Rich off Index Funds?
First off, it’s important to know how wealth is generally built in the stock market. Perhaps you have heard about something called compound interest?
It effectively works by earning interest on your interest.
For example, let’s say you have $1,000 invested in something that pays you a 10% interest annually. The first year you earn $100 in interest (10% interest on $1,000.)
You then reinvest the $100 so that you have $1,100 invested. So the next year you earn $110 (a 10% interest on $1,100.)
The extra $10 you earned the second year is 10% interest on your originally received and reinvested $100.
Makes sense? You probably know that index funds don’t pay interest, though, so how does the compounding effect work with them? Here is a short article you can read to fully understand it.
Could an S&P500 Index Fund Make You Rich?
With that out of the way, let’s look at some common indexes and how they have performed historically. We’ll begin with the most common index, the S&P500.
From the S&P500’s inception in 1926 to 2018, it has had an average annual return of 10%.
The return has varied greatly from year to year, from -15% in some years to +25% in others, but the average is 10%.
So if we assume that the S&P500 continues sporting a 10% annual return, can buying an S&P500 index fund make you rich?
Now I don’t know your definition of rich but for simplicity’s sake, let’s look at how long it takes to earn $1,000,000 with a 10% annual return.
- $100 invested monthly, would take around 46 years to reach a million.
- $200 would take around 38.
- $300 would take around 34.
- $400 would take around 31.
Here is a table showing you roughly how long it would take to make $500,000, $1,000,000, $2,000,000, and $4,000,000 with 10% compounding annually and depending on how much you invest per month.
|$100||38 Yrs||46 Yrs||53 Yrs||60 Yrs|
|$200||31 Yrs||38 Yrs||46 Yrs||53 Yrs|
|$300||27 Yrs||34 Yrs||41 Yrs||49 Yrs|
|$400||25 Yrs||31 Yrs||38 Yrs||46 Yrs|
|$500||23 Yrs||29 Yrs||36 Yrs||43 Yrs|
|$600||21 Yrs||27 Yrs||34 Yrs||41 Yrs|
|$700||19 Yrs||26 Yrs||33 Yrs||40 Yrs|
|$800||18 Yrs||25 Yrs||32 Yrs||39 Yrs|
Could a Dow Jones Industrial Average Index Fund Make You Rich?
The Dow Jones Industrial Average, DJIA for short, is another large and common index. It’s an index measuring the performance of the 30 largest companies listed on the U.S. stock exchanges.
From its inception in 1897 to 2018, it has had an average annual return of 5.42%. But it varies greatly between different periods. For example, I looked at the DJIA returns from the last 25 years, in which it had a 7.6% annualized return.
But again, let’s look at the 5.42% average. And again, the table shows how long it would take to make $500,000, $1,000,000, $2,000,000, and $4,000,000.
|$100||59 Yrs||72 Yrs||85 Yrs||98 Yrs|
|$200||47 Yrs||59 Yrs||72 Yrs||85 Yrs|
|$300||40 Yrs||52 Yrs||64 Yrs||77 Yrs|
|$400||35 Yrs||47 Yrs||59 Yrs||72 Yrs|
|$500||32 Yrs||43 Yrs||55 Yrs||68 Yrs|
|$600||29 Yrs||40 Yrs||52 Yrs||64 Yrs|
|$700||27 Yrs||37 Yrs||49 Yrs||61 Yrs|
|$800||25 Yrs||35 Yrs||47 Yrs||59 Yrs|
How a High-Performing Index Fund Could Make You Rich
When I was looking at different index funds I came across one that caught my eye, the Vanguard Small-Cap Growth Index fund. But before we even look at the performance I have to mention the fact that the fund is only 10 years old. And that it focuses on small-cap growth stocks, which are inherently more risky than many other alternatives.
Anyway, I thought it would be fun to have a high-performing index fund to look at also. Especially now that we have looked at a “low-performing” one and a medium-performing one.
Since its inception in 2011, the VSGAX has had an average annual return of 16.73%. So let’s put the numbers into a table again.
|$100||27 Yrs||31 Yrs||35 Yrs||40 Yrs|
|$200||22 Yrs||27 Yrs||31 Yrs||35,5 Yrs|
|$300||19,5 Yrs||24 Yrs||28,5 Yrs||33 Yrs|
|$400||18 Yrs||22 Yrs||26,5 Yrs||31 Yrs|
|$500||16,5 Yrs||21 Yrs||25 Yrs||29,5 Yrs|
|$600||15,5 Yrs||20 Yrs||24 Yrs||28,5 Yrs|
|$700||14,5 Yrs||19 Yrs||23 Yrs||27,5 Yrs|
|$800||14 Yrs||18 Yrs||22 Yrs||26,5 Yrs|
So could index funds make you rich? Probably.
But it depends on what you consider to be rich, how much you invest, what return you’ll be getting, and how long time you have.
One thing to look out for with long-term investing is inflation, which is usually around 2%. Now 2% might not seem like much but over a long period it can have a large impact on your returns. Especially if you’re getting low returns.
On a final note, if you’re not sure whether you should be investing in index funds or picking individual stocks, here is an article you can read, guiding you into making the right decision. After all, if you could pick the right stocks, the returns you could potentially get go through the roof.