Have $1,000 to invest in stocks? Put it in this index fund.

New investors just beginning their wealth growth journey may be intimidated by all the possibilities. Thousands of companies are listed on U.S. stock exchanges. Figuring out a few things you might want to buy to create a diversified portfolio is a big job, especially for a beginner who only has $1,000 to invest.

The good news is, there are some great investments you can put your precious $1,000 into. It is favored by famous investors such as Warren Buffett and the late Jack Bogle. And it's incredibly simple. S&P500 index fund. Let's see why.

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Invest $1,000 in this index fund

An S&P 500 Index Fund is a mutual fund or exchange-traded fund (ETF) that includes all the stocks tracked by the S&P 500 Index. The index consists of approximately 500 of the largest U.S. companies that have consistently posted profits for at least one year. This is the group of stocks that most people refer to when they talk about the “stock market.”

Because the fund's basket of stocks is preselected by an external committee, and because all the companies are relatively large and frequently traded, the S&P 500 Index Fund's overhead expenses are very low. No stock research or limited portfolio management is required, and trading costs are very low. By charging minimal fees for holding a fund, fund companies can pass that lower cost on to investors.

Actively managed mutual funds may charge an annual fee of 0.5% to 1% for investing in the fund. However, you can purchase an S&P 500 index fund for a fee of just 0.015%. That means you'll pay just $0.15 a year for every $1,000 you invest.

But here's the kicker. Most actively managed mutual funds will underperform index funds when fees are taken into account in a given year. And over the long term, few actively managed funds can consistently outperform an index excluding fees.

Why Buffett recommends the S&P 500 index fund

Warren Buffett advises investors to buy S&P 500 index funds rather than his own company's stock. berkshire hathaway.

The reason he thinks most investors should stick with index funds is simple. As he said in a letter to shareholders in 2016, this is the best possible choice “based on expectations.” In other words, if Buffett could only own one investment, it would be the S&P 500 index fund. And that's exactly what he instructed the trustees of his estate to purchase after he died.

S&P 500 index funds give you the diversification of owning many good businesses without the cost of finding them. You can pay for that cost with your own time, or you can pay the fund manager for their time (through investment fees). But index funds offer good diversification at low costs, making them a great place to invest your first $1,000.

Which index fund should you buy?

While you may have narrowed down your investment options from the thousands of individual stocks available for purchase, there are still plenty of S&P 500 index funds to choose from. Basically, there are only two things that differentiate each fund:

1. expense ratio. This is the percentage of assets that the fund company charges each year. The lower the expense ratio, the lower the cost of ownership.
2. Tracking error. This is a measure of how far an index fund's returns deviate from the returns of the underlying index. They can deviate for or against you. The best index funds have low tracking errors, ensuring that your returns closely match those of the index.

Below are some recommendations.

• Fidelity 500 Index Fund (FXAIX -0.87%): This mutual fund from Fidelity is a great option if you want to invest in Fidelity. The expense ratio is low at only 0.015% and the tracking error is 0.01%. There is no minimum investment amount to purchase shares. Since it is an investment trust, your favorite securities company may or may not carry it.
• Schwab S&P 500 Index Fund (NASDAQMUTFUND: SWPPX): You pay a 0.02% fee to own this mutual fund. charles schwab. Tracking error has remained around 0.02% so far. Schwab also has no minimum investment amount, but it is also a mutual fund that may or may not be purchased through a brokerage.
• Vanguard S&P 500 ETF (VOO -0.84%): This popular S&P 500 ETF is one of Buffett's favorites. His expense ratio is 0.03% and his tracking error is only 0.02%. This is more attractive than the Admiral Shares mutual fund version of an index fund, which has higher fees and requires a minimum investment of $3,000. ETFs have no minimum investment amount and can be purchased at any brokerage firm.