Warren Buffett Has Championed This 1 Investment for Decades, and It Could Turn $200 per Month Into $1.2 Million

Even though Warren Buffett owns a portfolio of individual stocks, he's not a stock trader. As most people know, he buys high-quality businesses at attractive valuations and holds them until the narrative plays out.

For retail investors, however, that's not what Warren Buffett recommends. Sure, some folks have the time and the skill set to do deep research on companies and identify similar opportunities. But most people don't. They want to do the right thing and set aside money for longer-term goals like retirement. For them, simplicity is the better path.

That's why Buffett has long advocated that retail investors simply buy into an ultra-low-cost S&P 500 index fund, make regular monthly investments, resist the urge to sell everything when the market turns volatile, and keep that money invested for years, if not decades.

It's perhaps the easiest way for regular investors to accumulate long-term wealth. And if investors can maintain the discipline to continue following this plan, even small monthly investments can turn them into millionaires.

Warren Buffett. Image source: Getty Images.

Why Warren Buffett recommends the S&P 500

While Buffett has built up his net worth by targeting individual companies, he generally advises against everyday investors trying to do the same thing. Instead, he believes they should simply own the U.S. stock market and participate in the long-term growth of the U.S. economy. This helps avoid the risk of any one company affecting the overall portfolio and allows you to participate in the evolution of the U.S. economy without making radical portfolio changes.

In his 2013 letter to Berkshire Hathaway shareholders, Buffett revealed the plans he had laid out for his wife's inheritance:

"My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard's.) I believe the trust's long-term results from this policy will be superior to those attained by most investors -- whether pension funds, institutions or individuals -- who employ high-fee managers."

While the recommendation might be specifically for his wife, it's a strategy anyone can use. Put 90% of the money in the Vanguard S&P 500 ETF (NYSEMKT: VOO) for long-term capital growth and 10% in Treasury bills for income, risk reduction, and liquidity. The choice of Vanguard's fund is very logical. Buffett believes that keeping fees as low as possible keeps more money in investors' pockets instead of those of the fund company or financial advisor.

How $200 per month can turn into more than $1 million

The key to turning smaller monthly investments into large sums of money is time. The longer you have to remain invested, the more the power of compounding can work in your favor.

Over its long history, the S&P 500 has returned about 10% per year. We have no way of knowing what the next few decades will look like, but a 10% return assumption is reasonable.

If you're starting from ground zero and invest $200 per month for 20 years at a 10% annual return, your ending portfolio balance is just short of $152,000.

But here's how time becomes the big wealth builder. If you invest that same $200 a month for 30 years instead of 20, your ending balance becomes $452,000. You've only invested an additional $24,000 total over those extra 10 years, but your portfolio balance grew by $300,000. That's the power of compounding over time.

And finally, if we extend the investment horizon out to 40 years under those same assumptions, the ending balance grows to $1.26 million.

Obviously, not everyone will have 40 years to invest like that. But a few small changes could still get you to the $1 million mark.

For example, you could increase the monthly investment amount from $200 to $300. That might not be so difficult if you have a 401(k) match that can do some of the work. If you have some cash set aside already, you can invest that in the Vanguard S&P 500 ETF right away and make monthly investments on top of it.

In the 20-year example above, if you start with a $1,000 investment instead of $0 and raise the monthly investment from $200 to $300, the ending balance can increase from $152,000 to $235,000. Small changes can make big differences.

Regardless of the numbers, the most important thing is getting started. Taking Buffett's advice to invest in the S&P 500 over the long term is one of the best paths to long-term wealth creation.

David Dierking has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.