Warren Buffett Says This Investment Is "The Best Thing" -- and It Could Turn $200 per Month Into $1 Million
Key Points
Warren Buffett has long recommended the S&P 500 index fund for everyday investors.
This investment requires next to no effort on your part, making it a nearly effortless way to build wealth.
However, there's one significant drawback to consider before you buy.
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The right investment can be life-changing, generating long-term wealth and helping build financial security. And according to Warren Buffett, it's simpler than many people think to create a robust portfolio.
In Berkshire Hathaway's 2020 shareholder meeting, the investing legend offered some advice for everyday investors looking to earn more from the stock market.
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While everyone's strategy is different, he noted that "for most people, the best thing to do is to own the S&P 500 index fund." Here's how that single fund could turn $200 per month into $1 million or more.
Image source: The Motley Fool.
Why invest in the S&P 500 right now?
Buffett has long recommended the S&P 500 index fund, even arguing that it can outperform actively managed funds -- which are often much more expensive to own.
In 2008, he made a million-dollar bet that the S&P 500 (SNPINDEX: ^GSPC) could outperform a group of five actively managed funds over 10 years. His S&P 500 index fund earned total returns of around 126% over that period, while the five actively managed funds averaged total returns of just 36%.
Not only is the S&P 500 index fund a wealth-building powerhouse, but it's also one of the safer investment options. Holding around 500 large-cap stocks across all market sectors, it offers immediate diversification in a single investment. Because many of the companies in the S&P 500 are industry-leading giants, this fund is also more likely to survive periods of market volatility.
Finally, as a passive investment, the S&P 500 index fund requires next to no effort on your part. You never need to choose individual stocks or decide when to buy or sell, making it ideal for busy investors who don't have much time to commit to building a portfolio.
How to earn $1 million with an S&P 500 index fund
The S&P 500 index fund is a slow-but-steady type of investment, and it performs best when given several decades of uninterrupted time to grow. The more consistently you can invest and the longer you leave your money alone, the more you could earn over time.
Historically, the S&P 500 itself has earned a compound annual growth rate of around 10%. If you're investing $200 per month while earning a 10% average annual rate of return, here's approximately how much you could accumulate over time:
| Number of Years | Total Portfolio Value |
|---|---|
| 20 | $137,000 |
| 25 | $236,000 |
| 30 | $395,000 |
| 35 | $650,000 |
| 40 | $1,062,000 |
Data source: author's calculations via investor.gov.
While the S&P 500 index fund has plenty of advantages, one significant downside is that it can't earn above-average returns. This investment is designed to earn returns in line with the market, so it can't beat the market.
If you have plenty of time to let your money grow, you can still earn $1 million over several decades. But those looking to maximize their earnings in the stock market may prefer growth ETFs or hand-selected individual stocks that have potential for much higher returns than the S&P 500.
There's no right or wrong answer here, as your investment preferences will depend on your goals and risk tolerance. For investors seeking a hands-off option that can deliver steady earnings over decades, the S&P 500 index fund could be a fantastic choice.
Should you buy stock in S&P 500 Index right now?
Before you buy stock in S&P 500 Index, consider this:
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Katie Brockman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.
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