The Boring Strategy That Builds $1 Million Portfolios

Legendary investor Warren Buffett once said that there's no need to do extraordinary things to achieve extraordinary results. And it's true. Many people incorrectly assume that building real wealth requires constantly analyzing stocks, reading earnings reports, and watching the stock market every day.

To be clear, if you have the time, knowledge, and desire required to evaluate individual stocks and maintain a portfolio, it can absolutely be a way to produce superior long-term returns. But you might be surprised how effective a much more hands-off approach can be. Here's an overview of how everyday investors can build million-dollar nest eggs using a simple strategy that allows you to sleep soundly at night.

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Use low-cost index funds

First, if you want a diverse stock portfolio that you don't have to watch too closely, it's tough to argue against low-cost index funds. For example, the Vanguard Total Stock Market ETF (NYSEMKT: VTI) spreads your money among thousands of publicly traded stocks. The Vanguard Russell 2000 ETF (NASDAQ: VTWO) can allow you to add some small-cap exposure, and the Schwab International Equity ETF (NYSEMKT: SCHF) can be a great way to diversify outside of the United States. And a fixed-income fund like the Vanguard Total Bond Index ETF (NASDAQ: BND) can provide safety and income, especially as you get closer to retirement.

Of course, these are just a few examples. But all have broad exposure to a certain investment objective, and with a bare minimum of expense.

Make it automatic

I can't stress this step enough. You don't have to invest a high dollar amount to get started. If you have $1,000, $500, or even $100 to invest, you can create a diversified portfolio. The key is to continue investing over time.

The best way to set yourself up for long-term wealth creation is to automate the process. Schedule an automatic deposit into your brokerage account on every payday. Depending on your brokerage, you may be able to set it up to automatically allocate to the investments of your choosing. If you do this, you will buy incrementally, regardless of what the stock market is doing, and will build your portfolio over time with no need to time the market or even decide when and how much to invest.

Use the right accounts

If your goal is to create wealth over the long term, it's important to pay as little in taxes as you possibly can. One way to accomplish this is to take advantage of tax-advantaged retirement accounts.

To be sure, if your employer offers a 401(k) matching contribution, you should absolutely take full advantage of it before you decide to invest through your own brokerage account. But beyond that, opening a traditional or Roth IRA can help you set aside money on either a tax-deferred or tax-free basis and eliminate the need to pay dividend and capital gains taxes on an ongoing basis.

The bottom line

Using low-cost index funds along with automatic investing can be a great way to build wealth over time. And you might be surprised at how effective it can be. For example, if you set up an automatic $500 monthly investment in a portfolio of low-cost index funds and achieve an average annual return of 10% over the long term, it would grow to over $1 million after 30 years.

Of course, there's no guarantee you'll achieve this level of performance, but that's roughly what the S&P 500 has produced over the past 50 years, so it's not too ambitious of a goal.

The best part is that this could work either as a stand-alone wealth creation strategy or in addition to a portfolio of individual stocks. As a personal example, I love evaluating and investing in individual stocks and have been doing so for more than 20 years. But I still use an automatic index fund strategy as the "backbone" of my portfolio, especially in retirement accounts.

Matt Frankel, CFP has positions in Vanguard Russell 2000 ETF. The Motley Fool has positions in and recommends Vanguard Total Bond Market ETF and Vanguard Total Stock Market ETF. The Motley Fool has a disclosure policy.