Warren Buffett Says This Investment Is "the Best Thing" for Most People -- and It Could Turn $200 Per Month Into $1 Million

Investing in the stock market is one of the most effective ways to generate long-term wealth, but the investments you choose can make or break your strategy.

There's no single correct way to invest, as the right approach for you will depend on various factors like your tolerance for risk, financial goals, and the time and energy you're willing and able to commit to researching stocks.

That said, some investments have widespread appeal. Famed investor Warren Buffett offers his advice on the best investment for most people, and there's good reason why it's his No. 1 recommendation.

Image source: The Motley Fool.

A powerful investment that balances risk and reward

At Berkshire Hathaway's 2020 annual meeting, Warren Buffett discussed his personal investing philosophy, offering his best advice for others seeking to maximize their financial returns.

While Buffett himself primarily invests in individual stocks, he noted that "for most people, the best thing to do is to own the S&P 500 index fund."

Buffett has a long history of recommending the S&P 500 index fund, going so far as to bet $1 million that this type of investment could outperform a group of actively managed hedge funds back in 2008. Over 10 years, his S&P 500 index fund earned total returns of close to 126%, while the five hedge funds averaged returns of around 36% in that time.

The S&P 500 (SNPINDEX: ^GSPC) itself is a powerhouse of an index, containing stocks from 500 of the largest and strongest companies in the U.S. Not only are these stocks impressive wealth-building investments, but they're also more likely to recover from market downturns. Industry-leading companies will still face short-term volatility, but in general, they're robust enough to weather the storms and experience long-term growth.

By investing in a single S&P 500 index fund, you'll gain exposure to all 500 companies within the index, building an instantly diversified portfolio with next to no effort on your part.

Turning $200 per month into $1 million

Investing in the stock market is a long-term approach to generating wealth, and any investment that promises to make you a millionaire overnight will likely cost you more than you earn.

Even the strongest investments often require decades of consistent contributions to see substantial gains. The earlier you get started, though, the less you'll need to invest each month to reach your goals.

Over the last century, the S&P 500 itself has earned a compound annual growth rate of around 10%. Let's say your investment earns a 10% average annual return going forward, and that you're investing $200 per month. At that rate, here's approximately how your savings would add up over time:

Data source: Author's calculations via investor.gov.

S&P 500 index funds require very little maintenance, and they make fantastic set-it-and-forget-it type investments. By investing a small amount regularly and allowing your money as much time as possible to grow, you could build a million-dollar portfolio with little effort on your end.

One major drawback before you buy

Perhaps the biggest downside to consider with an S&P 500 index fund is that you can't earn above-average returns. This investment is built to earn returns in line with the market, so it can't outperform the market.

This may not be a deal-breaker for investors seeking a low-fuss investment with built-in diversification and stability. But if you're looking to maximize your earnings, a growth fund could be a better fit. Even slightly higher-than-average returns can be a game changer, especially over the long term.

For example, if you were investing in a growth ETF earning 13% average annual returns, $200 per month could grow into around $2.4 million after 40 years -- more than double what you could earn in that time with 10% average annual returns.

Of course, growth stocks and funds also come with increased risk for volatility, so they won't be the right option for everyone either. But by understanding your goals and risk tolerance, it will be easier to decide on the right investment for you.

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.