Key insights
- The article highlights Warren Buffett's recommendation of investing in S&P 500 index funds for long-term wealth accumulation. It emphasizes the historical stability and positive returns associated with these funds over 20-year periods. While S&P 500 index funds may not offer the highest potential returns, their passive nature and proven track record make them a suitable option for investors seeking stability. This reinforces a bullish outlook for passive investment strategies in US equities.
There are few investors whose words carry as much weight as Warren Buffett. The stock market legend is famous for offering advice throughout his decades-long career, helping everyday investors build lifelong wealth.
While Buffett may be known for his stock-picking ability, his advice for others is surprisingly simple. There's one index fund he heavily recommends, and it could help you build a portfolio worth $1 million or more while barely lifting a finger.
For investors seeking to build long-term wealth with minimal effort, Buffett highly recommends buying an S&P 500 index fund. In fact, in Berkshire Hathaway's 2020 shareholder meeting, Buffett went so far as to say that it's "the best thing" for most investors.
He also backed up his advice in 2008 with a $1 million bet that an S&P 500 index fund could outperform a group of five actively managed hedge funds. After 10 years, his investment had earned total returns of around 126%. The five hedge funds averaged returns of just 36%, and even the highest-earning fund only earned total returns of around 88%.
There are a few reasons why an S&P 500 index fund is such a solid choice:
An S&P 500 index fund is such a stable investment that, historically, it's proven harder for long-term investors to lose money with one than to earn money.
According to analysis from Crestmont Research, every single 20-year period in the S&P 500's history has ended in positive total returns. In other words, if you were to buy an S&P 500 index fund at any point in the last century and hold it for 20 years, you'd have made money.
With enough time, it's possible to earn $1 million or more with an S&P 500 index fund. However, it may require a bit more effort compared to higher-earning investments like growth funds or individual stocks.
Because an S&P 500 index fund aims to track the market, it can't beat the market. For investors seeking a passive investment that offers long-term stability, the lower earnings might be a worthwhile trade-off. That said, even seemingly minor differences in total returns can add up over time.
The S&P 500 itself has earned an average rate of return of around 10% per year, historically. If you were to invest $200 per month, here's how that could compound over time, depending on whether you're earning a 10% average annual return or a slightly higher 12% average annual return:
An S&P 500 index fund can still perform exceptionally well given enough time. But to reach that $1 million mark, you'll need to either invest for several decades or contribute several hundred dollars per month.
Higher-earning investments like growth funds can be more volatile, so it's up to each individual investor to decide whether the higher potential earnings are worth the risk. But if you're comfortable with average returns, an S&P 500 index fund can be a fantastic choice for stability, reliability, and consistent long-term earnings.