Buffet Suggests Majority of Investors Opt for Specific Index Fund, Which Could Transform $200 Monthly Investment into Over $227,000 Worth of Assets
Buffet Suggests Majority of Investors Opt for Specific Index Fund, Which Could Transform $200 Monthly Investment into Over $227,000 Worth of Assets
Starting out in the stock market might feel overwhelming, especially if you're new to investing. However, it's simpler than it may seem, even if you don't have a lot of experience.
Making a decision on where to invest is the most crucial choice you'll need to make. Luckily, there are numerous investments that are excellent fits for beginners and individuals looking for a stress-free option.
Although investing choices are subjective, there's one recommendation that gets a lot of praise from billionaire investor Warren Buffett: The S&P 500 index fund. Here's why it's such a great investment and how you could potentially make hundreds of thousands of dollars with minimal effort.
What is an S&P 500 index fund?
Before diving into why this could be a smart investment, it's essential to understand exactly what an S&P 500 index fund is.
An index fund, in general, is a collection of stocks that reflect a specific market index. An S&P 500 index fund, then, tracks the S&P 500 (^GSPC 1.09%) and includes all the stocks within that index, mirroring its performance over time.
If you're new to the stock market or just looking for a safer and more dependable investment, there are several advantages to investing in an S&P 500 index fund:
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- Instant diversification: By investing in just one S&P 500 index fund, you'll immediately own a stake in stocks from 500 companies across various industries. Greater diversification can lower your risk, and investing in an index fund makes it effortless to diversify your portfolio properly.
- A vast collection of strong stocks: The S&P 500 itself only includes stocks from the largest and most robust corporations in the U.S. -- ranging from tech titans like Apple and Microsoft to time-honored brands like Coca-Cola and Procter & Gamble. These companies are much more likely to weather periods of volatility, and when you're investing in hundreds of them at once, your portfolio is more secure.
- An impressive track record: The S&P 500 has been around for many decades, and throughout that time, it's faced some of the worst crashes and recessions ever imagined. Yet so far, it's recovered from every single one. While nobody can predict the future, it's highly likely that it will bounce back from future setbacks as well.
$33,000
Research suggests that as long as you're investing for at least a few decades, it's extremely unlikely that you'll lose money.
Analysts at Crestmont Research studied the S&P 500's historical performance over 20-year periods, finding that every single one of those periods ended in positive total returns. In other words, if you'd invested in an S&P 500 index fund at any point in history and held it for 20 years -- no matter how volatile the market was in that time -- you'd have made money.
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Gaining Buffett's endorsement
$98,000
All these advantages make the S&P 500 a reliable yet powerful investment -- so much so that it's often recommended by Warren Buffett.
"In my view, for most people, the best thing to do is to own the S&P 500 index fund," Buffett said during Berkshire Hathaway's 2020 annual meeting when discussing the ideal investment strategy for the average American. Through Berkshire Hathaway, he also owns two S&P 500 funds: The Vanguard S&P 500 ETF (VOO 1.13%) and the SPDR S&P 500 ETF Trust (SPY 1.20%).
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In 2008, Buffett also famously wagered $1 million that an S&P 500 index fund could beat a group of hedge funds over 10 years. The five hedge funds averaged returns of around 36% in that time, while Buffett's S&P 500 fund earned nearly 126% returns. Even the highest-earning hedge fund only earned complete returns of just under 88% in total.
$227,000
"Let me emphasize that there was nothing unusual about stock market behavior during the ten-year stretch," Buffett later wrote of the experiment in an annual letter to shareholders.
He continued: "Seizing the opportunities then offered does not require great intelligence, a degree in economics or a familiarity with Wall Street jargon... What investors then need instead is an ability to both disregard mob fears or enthusiasms and to focus on a few simple fundamentals."
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Constructing a portfolio worth hundreds of thousands of dollars
$479,000
As Buffett's experiment demonstrated, keeping your investment for the long term pays off. While the market can be volatile in the short term, investing regularly for at least a decade or two can help you earn significant returns.
Historically, the S&P 500 itself has earned an average rate of return of around 7% per year. Your returns will vary, of course, depending on how the market performs in the coming years. But let's say you're earning 7% average annual returns while investing $200 per month. Depending on how many years you invest, here's an approximation of what you could earn:
| Number of Years | Total Portfolio Value || --- | --- || 10 | $33,000 || 20 | $98,000 || 30 | $227,000 || 40 | $479,000 |
Producing a $227,000 total savings will require investing for around 30 years, but if you're able to stay in the market only slightly longer, you could earn exponentially more. The sooner you start investing, then, the more straightforward it will be to make a lot of money.
Investing in an S&P 500 index fund can be an effective method with minimal involvement, and its impressive historical performance makes it a more secure choice compared to numerous other investment options. Kick-start your investment journey today and maintain your position in the market for an extended period. With perseverance, you might accumulate more than anticipated.
After understanding the benefits of an S&P 500 index fund, you might consider investing a portion of your finance or savings into this investment opportunity. Warren Buffett, a billionaire investor, strongly endorses this type of investment due to its diversification, collection of strong stocks, and impressive track record.
Managing your money wisely in the stock market involves making informed decisions based on available resources. Carefully considering an investment in an S&P 500 index fund could potentially lead to significant returns in the long term, as evidenced by historical data and Buffett's own experiences.