Many people share the goal of building long-term wealth, but achieving it isn’t always easy. The median net worth of U.S. households is about $192,000, according to the Federal Reserve’s latest consumer finance survey data.
Investing in the stock market is one of the most accessible ways to create wealth, but it can also be scary at times. Depending on where you invest, it can cost thousands of dollars and hours of research just to get started.
However, some investments can pay off with much less effort. Whether you’re new to the stock market or looking for an easy investment that will make you a lot of money doing little, this Warren Buffett-approved index fund is a great option.
Image source: Motley Fool.
Proven investment strategy
Warren Buffett may be one of the most famous investors of all time. But his advice for those looking to get started in the stock market is simpler than you might think. That’s investing in an S&P 500 index fund.
“In my opinion, the best thing for most people is to own an S&P 500 index fund,” he said at Berkshire Hathaway’s 2020 annual meeting. Buffett also owns two S&P 500 funds through Berkshire Hathaway: Vanguard S&P 500 ETF (NYSEMKT: VOO) and SPDR S&P 500 ETF Trust (NYSEMKT: SPY).
In 2008, he also lived up to his word by betting that an S&P 500 index fund could outperform a group of hedge funds over a 10-year period. After 10 years, his investment earned a total return of nearly 126%. During this time, the average return for the five actively managed funds was just 36%.
Build wealth with virtually zero effort
The S&P 500 Index Fund tracks the S&P 500 Index (SNPINDEX: ^GSPC) itself. This means that it includes the same stocks as the index and aims to reflect their performance over the long term. The S&P 500 includes the stocks of 500 of the world’s largest companies, and by investing in one index fund, you instantly own shares in all of those stocks.
Perhaps the biggest perk of S&P 500 index funds is that they require very little effort. Every stock in the fund is chosen for you, and index funds perform best when given as long as possible to grow, ideally several decades.
In other words, all you need to do is invest consistently and wait for your investment to start producing returns. It may take a few years, or even a decade or two, to see significant returns, but long-term positive returns are almost guaranteed.
In fact, research shows that it’s nearly impossible to lose money in an S&P 500 index fund as long as you hold your investment for at least 20 years. Investment research firm Crestmont Research analyzed the 20-year total return of the S&P 500 Index and found that every 20-year period in the index’s history had a positive return, regardless of how volatile that period was. It turned out that it ended.
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Turn $200 per month into over $332,000
Consistency is key to building wealth in the stock market, but you don’t need to invest thousands of dollars every month to see significant returns. In some cases, just a few hundred dollars can make a big difference.
Historically, the S&P 500 has earned an average annual return of about 7%. This means that while it is very likely that you will get a 7% return each year, your annual return over several decades will average around 7%.
If you invest $200 a month and earn an average annual return of 7%, here’s roughly how much money you can accumulate, depending on how many years you allow your money to grow.
years
Total portfolio amount
20
$98,000
twenty five
$152,000
30
$227,000
35
$332,000
40
$479,000
Data source: Author calculations from investor.gov.
It would take about 35 years of consistent investing to reach $332,000 in total savings, but if you had a few more years to invest, you could potentially see even greater returns. Time is an extremely valuable asset when it comes to investing, so the sooner you start, the easier it will be to build long-term wealth.
S&P 500 index funds are a great option for novice investors as well as investors who simply want to grow their wealth with less effort. By starting now and investing consistently, you’ll reap more returns than you can imagine over time.
Don’t miss out on this potentially lucrative second chance
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Katie Brockman has a position in the Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Berkshire Hathaway and Vanguard S&P 500 ETFs. The Motley Fool has a disclosure policy.
The article This Warren Buffett Index Fund Can Turn $200 a Month into $332,000 with Virtually Zero Effort was originally published by The Motley Fool.
