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I’ve written several posts about the importance of investing in the market to secure your retirement.  Unfortunately, many in our generation find it too cumbersome, time consuming, or complicated to properly build and maintain a diversified portfolio.  We either delegate our money management to professionals, or we let our savings (if we have any) sit in low yield accounts.  A lot of times, many in our generation won’t have the skills, knowledge, or even interest to make sure their money is providing the types of returns they’ll need to retire comfortably.

However, there is a way to ensure a stable retirement without spending all your time watching stock tickers.  Using a simple investment method, you can get exposure to hundreds of the country’s top companies.

Index funds

I’m sure that you’ve all heard the terms “Dow Jones Industrial”, “Nasdaq”, and “S&P 500.”  These three phrases refer to stock indexes.  Essentially, all they are are groupings of different stocks in different weightings.  The Dow Jones index has 30 of the largest companies from each of the major industries.  The Nasdaq index heavily tracks technology companies.  The S&P 500 tracks 500 of the largest US companies.  For the most part, each index moves in conjunction with the other indexes, so tracking any one should be sufficient to gauge how the market is doing.  However, due to its breadth and depth of coverage, the S&P 500 is the index of choice for the major market players and trackers.

Traditionally, the stock market, and by association, the S&P 500, have returned an average of anywhere from 7 to 12% per year.  What if there was a way for you to invest directly in the S&P 500, without having to worry about picking individual stocks?  Fortunately, there is.

There are a variety of mutual funds and exchange traded funds which invest in the same companies, and the same weightings, that the S&P 500 tracks.  By investing your money in these funds, and continuing to invest a small amount each month to dollar cost average your investments, you can reap the same gains (and suffer the same losses) as the general market.

What funds to invest in

There are a variety of mutual funds that provide complete exposure to the S&P 500.  The Vanguard 500 (VFINX) is one of the oldest and most renowned funds in the world.  It was also the first fund to track the S&P 500.  It has a low expense ratio and has a solid name.  Additionally, the Fidelity Spartan 500 (FSMKX) tracks the S&P 500 and has a slightly lower expense ratio than the Vanguard 500.

With regards to exchange traded funds, the SPDR S&P 500 ETF (SPY) – also known as the Spiders, is the 800-pound gorilla.  The iShares S&P 500 Index (IVV) is also a possibility.

There are several other funds out there, but these are the most popular ones.  If you have a favorite of your own, feel free to invest in those.

How to invest

Assuming you want to invest in one of these funds, you have a few different options for how to go about doing it.  Your first option is to get an account with a broker, such as Smith Barney, deposit funds into that account, and have your broker make your investments for you.  In addition to paying the fees of the fund itself, you’ll have to pay broker fees, so this is the most expensive of all of your options.

You could also open an account with a discount brokerage, such as E*Trade or Scottrade, and use their mutual fund investment options to open a position in one of the funds mentioned above.  Each month, you could then transfer money into your account and use that money to continually invest in the fund of your choice.  By doing this, you’ll need to pay the per-trade commission that’s associated with your account.

Finally, you could go directly to the fund’s website, download their application, fill it out, and mail it in along with a check for your initial investment.  When you fill out the form, make sure to enable the fund’s managers to automatically withdraw funds from your checking account and use them to buy more shares of the fund on a monthly basis.  This is the cheapest option, as you won’t have to pay brokerage fees.  It’s also the simplest option, as you won’t need to do anything after filling out the initial application (until you want to withdraw your funds).

Summary

By investing in funds that track the S&P 500, you gain a low-hassle, low-cost method of taking advantage of the long-term returns of the stock market with minimized overhead.  By doing so, you can set yourself up for a stable retirement.  The key is to hold these funds for a long time, at least 10-20 years, and continue investing money on a recurring basis.

The disadvantage of this strategy is that you’ll realize the same losses and gains that the market realizes.  Your account will go down at times.  You will miss out on maximizing your returns by concentrating your money in stocks that you believe are high-growth firms.  You won’t have exposure to commodities, bonds, or international firms, which are all key components of a properly balanced portfolio.

However, this is a good way to get started with a diversified portfolio.  If you’re one of those people that hates to think about percentage returns, average gains, returns on investment, managing and depositing money, selling high and buying low, then this strategy is a good one for you.