Investing doesn’t have to be complicated. There’s no need to spend countless hours researching specific stocks to find the next big winner. Most financial experts agree that if you’re short on time and can’t dive into detailed analysis, opting for diversification is the way to go.

Index funds offer an excellent way to achieve that diversity, making them a great option for long-term investments, allowing your money to grow over time. If you want to amass $1 million for retirement, consider buying these two index funds and hold onto them for the long haul.

The S&P 500

The S&P 500 has created wealth for countless investors over the years. This fund includes 500 of the largest companies across various sectors and serves as an important indicator of the U.S. stock market’s overall performance.

To qualify for inclusion in the S&P 500, publicly traded companies must typically have a market cap above $18 billion and have been publicly traded for a minimum of one year, along with meeting other criteria. As of September 30, the major sectors in the index are as follows:

Information technology: 31.7%

Financials: 12.92%

Healthcare: 11.61%

Consumer discretionary: 10.1%

Communication services: 8.86%

Industrials: 8.51%

Consumer staples: 5.89%

A lot of wealth has been generated by investment in the S&P 500. Notable investor Warren Buffett attributes much of his success to the advantage of time. If you begin to invest in the S&P 500 in your 20s or early 30s and continue for 30 years, the S&P 500 has shown an average annual return of 10.7% over the past 30 years.

By contributing $5,000 annually to this index, you could exceed $1 million after three decades. While this might seem high, breaking it down to monthly contributions would amount to just $416 per month.

Additionally, $5,000 falls within the contribution limits for both IRA and Roth IRA accounts, providing potential tax benefits either when you deposit or when you later withdraw money from these accounts.

If you’re worried about the market being too high right now, consider the strategy of dollar-cost averaging. This means investing a set amount in the S&P 500 at regular intervals, helping to even out your average purchase cost over time. A simple and effective way to invest in the S&P 500 is through an exchange-traded fund like the SPDR S&P 500 ETF Trust (NYSEMKT: SPY).

The S&P MidCap 400

Another valuable index fund to consider is the S&P MidCap 400, which includes mid-sized companies. According to S&P Global, the average market cap of a company within the S&P MidCap 400 is $6.7 billion, meaning these firms are smaller than those in the S&P 500 but larger than small-cap stocks.

This index is more concentrated in sectors such as industrial, financial, and consumer discretionary. Mid-cap stocks typically offer higher growth potential than large-cap stocks while presenting less risk than small-cap stocks, which can be more volatile due to interest rate changes and economic fluctuations. Since 1995, the S&P MidCap 400 has outperformed both the S&P 500 and the S&P SmallCap 600, achieving an annualized return close to 12%.

Exchange-traded funds mirroring the performance of the S&P MidCap 400, such as the Vanguard S&P Mid-Cap 400 ETF (NYSEMKT: IVOO), have a beta of 1.2. Beta measures the risk level of a stock or ETF in relation to the broader market. The S&P 500 has a beta of 1, indicating it matches market volatility, while assets with betas exceeding 1 tend to be more volatile.

A beta of 1.2 suggests higher potential gains during market upswings but also increased risk during downturns. Including these riskier assets in your portfolio can help keep pace with inflation over time.

Bram Berkowitz does not own shares in any of the mentioned stocks. The Motley Fool also has no holdings in any of these stocks. The Motley Fool adheres to a strict disclosure policy.

The Motley Fool is a content partner of YSL News, delivering financial insights and analysis aimed at empowering individuals to take charge of their financial futures. The content is created independently of YSL News.

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