Warren Buffett is one of the most famous and successful investors in the world, so when he gives advice, it often pays to listen.
While everyone's investing strategy will differ based on personal preferences, there's one type of index fund that Buffett has long recommended. This fund can fit into any portfolio, it requires next to no effort on your part, and it could even help you become a millionaire: the S&P 500 index fund.
More powerful than it seems
An S&P 500 index fund follows the S&P 500 itself, containing the same stocks as the index and mirroring its long-term performance. This index has high standards, so the companies in the S&P 500 are some of the largest and strongest organizations in the U.S.
Buffett swears by this investment, and back in 2008, he put his money where his mouth was with a $1 million bet.
Buffett bet that over 10 years, an S&P 500 index fund would outperform five actively managed hedge funds. His investment, the Vanguard 500 Index Fund Admiral Shares (NASDAQMUTFUND:VFIAX), not only won, but it trounced the competition -- earning returns of nearly 126% while the hedge funds averaged just 36%.
Perhaps the best part of an S&P 500 index fund, though, is that it's a passive investment that requires next to no upkeep. You never need to choose individual stocks, research companies, or decide when to buy or sell. Simply invest whatever you can afford, then wait for your money to grow.
It's also a smart choice during periods of volatility. The S&P 500 itself has an impeccable track record when it comes to recovering from downturns. Whether we face a recession, bear market, or any other rough patch, an S&P 500 index fund is almost guaranteed to bounce back.
Building a million-dollar portfolio
With enough time and consistency, it's possible to earn well over $1 million with an S&P 500 index fund.
Historically, the index has earned average returns of around 10% per year. While the short term can be volatile, all those ups and downs have averaged out to roughly 10% per year over the long run.
If you were to invest, say, $300 per month while earning a 10% average annual return, here's approximately how much you could accumulate depending on how many years you invest:
| Number of Years | Total Savings |
|---|---|
| 20 | $206,000 |
| 25 | $354,000 |
| 30 | $592,000 |
| 35 | $976,000 |
| 40 | $1,593,000 |
Data source: Author's calculations via Investor.gov.
The two key factors affecting your total earnings are the amount you invest each month, and how long you give your money to grow.
Even if you don't have 40 years to build your savings, if you can invest a little more each month, it could dramatically increase your earnings. Or if you can't afford to invest much monthly, giving your money a few more years to grow will also boost your savings exponentially.
The stock market can be intimidating, especially during periods of volatility. But S&P 500 index funds are one of the safer investments out there, and they've earned Buffett's seal of approval. By getting started investing now, you'll be on your way to generating wealth that lasts a lifetime.
Katie Brockman has positions in Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
Index funds, particularly the S&P 500 index fund, are an area I've delved deeply into. Warren Buffett's advocacy for these funds is rooted in their simplicity, reliability, and historically proven performance. Let's break down the concepts within the article:
S&P 500 Index Fund
The S&P 500 index fund essentially mimics the S&P 500 index, which represents a diversified collection of the 500 largest publicly traded companies in the U.S. It's a passive investment, tracking the index's performance, making it an attractive option for many investors.
Warren Buffett's Bet
Buffett famously bet $1 million that an S&P 500 index fund would outperform a selection of actively managed hedge funds over a decade. His choice, the Vanguard 500 Index Fund Admiral Shares (VFIAX), significantly outperformed the hedge funds, proving the power of low-cost index investing.
Passive Investment and Ease of Maintenance
One of the main appeals of the S&P 500 index fund is its passive nature. It requires minimal effort and expertise. You invest your money and let it grow without the need for constant monitoring, stock picking, or market timing.
Long-Term Performance and Volatility
The S&P 500 index, over the long run, has shown an average annual return of around 10%. While short-term fluctuations occur, historical data reflects a consistent growth pattern. Moreover, it has demonstrated resilience, recovering from various market downturns.
Building Wealth Over Time
The article demonstrates how consistent investments, even modest ones like $300 per month, can compound over years to potentially accumulate substantial wealth. The longer the investment horizon and the more consistent the contributions, the greater the potential for wealth accumulation.
Flexibility in Investing
The article highlights the flexibility in investment strategies—an increase in monthly contributions or extending the investment period can significantly impact the final savings. It emphasizes the importance of consistency and time in wealth accumulation.
Safety and Endorsem*nt
Buffett's endorsem*nt of S&P 500 index funds underscores their reliability and safety, particularly for long-term wealth generation. It's positioned as a safer option, especially during market volatility.
In essence, the article highlights the simplicity, long-term growth potential, and endorsem*nt by a successful investor like Warren Buffett as reasons to consider S&P 500 index funds for wealth creation. This aligns with my knowledge and understanding of these investment vehicles as reliable, low-cost, and effective options for various portfolios.
