Investors: This Is Warren Buffett's No. 1 Index Fund Recommendation -- and It Could Potentially Make You a Millionaire
Key Points
Index funds and ETFs are low-maintenance, well-diversified investment options.
Investing consistently over time is one of the best ways to build long-term wealth.
Sometimes, saving just a couple hundred dollars per month could amount to over $1 million.
Investing in index funds or exchange-traded funds (ETFs) is often simpler and more straightforward than buying individual stocks. Each fund may contain dozens or even hundreds of stocks, giving you exposure to entire industries with just one investment.
With countless funds to choose from, though, it can be challenging to find the right fit. While everyone's situation is different, there's one investment that famed investor Warren Buffett says is the best choice for most people -- and it could help you build a portfolio worth $1 million or more.
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Buffett's best recommendation
During Berkshire Hathaway's annual meeting in 2020, Warren Buffett discussed his outlook on the stock market and why investors shouldn't be afraid to buy. As for where investors should buy, he noted that "for most people, the best thing to do is to own the S&P 500 (SNPINDEX: ^GSPC) index fund."
An S&P 500 index fund or ETF is an investment that tracks the S&P 500 itself. Each fund contains stocks from 500 of the largest companies in the U.S., and by owning any S&P 500 fund, you'll instantly own a stake in all 500 of those businesses.
This isn't the first time Buffett has recommended an S&P 500-tracking fund, though. In 2008, he made a $1 million bet that an S&P 500 index fund could outperform a selection of five actively managed hedge funds. The S&P 500 fund earned total returns of close to 126% over the following 10 years, while the five hedge funds averaged a return of just 36% in that time.
Not only can an S&P 500 fund outperform many other investments, but it's also safer in several ways:
- Plenty of diversification limits risk: Investing in a variety of stocks across multiple market sectors can help mitigate risk during a market downturn. Because each S&P 500 index fund contains stocks from 500 companies across all industries, you can achieve loads of diversification with just one investment.
- The S&P 500 has a flawless track record: While nobody can predict what the market will do in the future, the S&P 500 has recovered from every crash, recession, and bear market it has ever faced. In fact, analysis from Crestmont Research found that every single rolling 20-year period throughout the S&P 500's history has ended in positive total returns. This means that if you'd invested in an S&P 500-tracking fund at any point and held it for 20 years, you'd have made money, regardless of how volatile the market was in that time.
- It requires minimal effort on your part: ETFs and index funds are passive investments, so you never need to worry about choosing individual stocks. They also perform best when left alone for decades. All you have to do is invest consistently, then let your investment do the rest.
Despite being one of the safer investment choices, S&P 500 index funds can also help you build a substantial amount of wealth -- potentially earning $1 million or more.
A supercharged investment to help make you a millionaire
Time and consistency are your best friends when it comes to building wealth in the stock market.
Historically, the S&P 500 itself has earned a compound annual growth rate of around 10%. If you were earning a 10% average annual return, here's approximately what you'd need to invest each month to reach $1 million, depending on how many years you have to let your money grow.
| Number of Years | Amount Invested Per Month | Total Portfolio Value |
|---|---|---|
| 20 | $1,500 | $1.031 million |
| 25 | $850 | $1.003 million |
| 30 | $525 | $1.036 million |
| 35 | $325 | $1.057 million |
| 40 | $200 | $1.062 million |
Data source: Author's calculations via investor.gov.
The longer you wait to begin investing, the more you'll need to contribute each month to reach your goal. Even if you can't afford to save hundreds of dollars per month, you can often accumulate more by saving small amounts for longer periods of time than by saving a larger amount later in life.
S&P 500 index funds and ETFs are a fantastic way to build wealth with minimal effort on your part, but time is your most valuable resource. By getting started investing sooner rather than later, you can potentially build a portfolio worth well over $1 million.
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.