Investors often turn to Warren Buffettlooking for stock tips, and he has given the same advice for years: Periodically put money into an S&P 500 index fund. Some readers may be surprised by that recommendation given that Buffett runs Berkshire Hathaway, but he has never actually recommendedBerkshire stock to anyone.
Here's how Buffett's advice could turn $400 per month in $825,000 for patient investors.
An S&P 500 index fund is a basket of American businesses
The Vanguard S&P 500 ETF (VOO -0.61%) is one of several good S&P 500 index funds. Like its benchmark, the fund tracks 500 U.S. companies that represent a blend of value stocks and growth stocks from all 11 stock market sectors. Its constituents cover 80% of the U.S. equity market and more than 50% of the global equity market, meaning investors that buy shares are effectively spreading money across many of the world's most influential businesses.
The chart below shows the top 10 positionsin the Vanguard S&P 500 ETF, which collectively account for 32% of its weighted exposure. The other 490 positions account for the remaining 68%.
Chart by Author.
Warren Buffett wrote the following in his 2016 shareholder letter: "American business -- and consequently a basket of stocks -- is virtually certain to be worth far more in the years ahead." That sentiment is the investment thesis for the Vanguard S&P 500 ETF.
The American economy is the largest and arguably the most innovative economy on the planet -- 13 of the 15 largest companies in the world are U.S. companies -- and spreading capital across a basket of American businesses has historically worked out quite well.
A time-tested investment strategy that has been profitable like clockwork
The S&P 500 has been a profitable investment over every rolling 20-year period since its inception in 1957, and its precursor (the Composite Stock Index) was a profitable investment over every rolling 20-year period since its inception in 1926. The profits are typically far from meager.
The S&P 500 produced an average 20-year return of 386% over the last decade, and the index soared 1,630% over the last three decades, compounding at roughly 10% annually. At that pace, $400 invested monthly in the Vanguard S&P 500 ETF would grow into $825,000 over the next three decades.
Some readers may not have $400 per month, and others may wish to contribute more. Assuming the S&P 500 continues to return 10% annually, the chart below shows how different monthly contributions would grow over the next one, two, and three decades.
Holding Period | $200 Per Month | $600 Per Month | $800 Per Month |
---|
10 Years | $39,973 | $119,918 | $159,891 |
20 Years | $143,652 | $430,956 | $574,607 |
30 Years | $412,569 | $1.2 million | $1.7 million |
Chart by Author. Note: All dollar amounts assume 10% annual compounding returns during the specified time period.
An S&P 500 index fund can bring much-needed diversity to a portfolio of stocks
Some investors prefer index funds and others prefer individual stocks. Either is option is fine, but investors who lean toward individual stocks should consider supplementing their portfolios with an S&P 500 index fund like the Vanguard S&P 500 ETF. There are two reasons that strategy makes sense.
First, an S&P 500 index fund mitigates concentration risk. Investing in a few companies, or even a few sectors, can have catastrophic consequences if those companies or sectors perform poorly. An S&P 500 index fund offers broad-based diversity that makes catastrophic outcomes less likely.
Second, beating the S&P 500 is difficult. Less than 90% of large-cap funds outperformed the index over the last decade, meaning most professional investors would have done better by their clients if they'd simply bought an S&P 500 index fund. The same logic applies to individual investors.
Personally, I prefer a blended approach. I own dozens of growth stocks, but I also keep a substantial portion of my portfolio in the Vanguard S&P 500 ETF. I see it as a smart hedge. If my stocks beat the market, then my entire portfolio will beat the market. But I can rest easy knowing that, even if I'm wrong about every stock I own, the S&P 500 has been profitable like clockwork for patient investors.
Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Trevor Jennewine has positions in Amazon.com, Nvidia, Tesla, and Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Alphabet, Amazon.com, Apple, Berkshire Hathaway, JPMorgan Chase, Meta Platforms, Microsoft, Nvidia, Tesla, and Vanguard S&P 500 ETF. The Motley Fool recommends UnitedHealth Group. The Motley Fool has a disclosure policy.
FAQs
The S&P 500 produced an average 20-year return of 386% over the last decade, and the index soared 1,630% over the last three decades, compounding at roughly 10% annually. At that pace, $400 invested monthly in the Vanguard S&P 500 ETF would grow into $825,000 over the next three decades.
Does Warren Buffett outperform the S&P? ›
Berkshire Hathaway (BRK. A 0.62%) (BRK. B 0.67%) CEO Warren Buffett is widely considered a legend on Wall Street, and for good reason. The conglomerate's portfolio has substantially outperformed the benchmark S&P 500 since Buffett became CEO in 1965.
What stock does Warren Buffett recommend? ›
Apple Inc.
Not only is Apple Berkshire's largest public stock holding, it's not even close. Apple represents about 44.3% of Buffett's total portfolio, and his $185 billion Apple stake is more than four times larger than his second-largest investment.
What are Warren Buffett's 5 rules of investing? ›
A: Five rules drawn from Warren Buffett's wisdom for potentially building wealth include investing for the long term, staying informed, maintaining a competitive advantage, focusing on quality, and managing risk.
Can you become a millionaire from index funds? ›
Still, there's good news from this chart: With the right investing discipline, a solid index fund and time, there's a good chance you can become a millionaire, even if you understand little about the stock market. In fact, if you follow this plan, it may be difficult to avoid becoming a millionaire.
What is Warren Buffett's average return? ›
The Warren Buffett Portfolio obtained a 10.17% compound annual return, with a 13.67% standard deviation, in the last 30 Years.
What is the 10 year return for Berkshire Hathaway? ›
Ten Year Stock Price Total Return for Berkshire Hathaway is calculated as follows: Last Close Price [ 441.26 ] / Adj Prior Close Price [ 125.43 ] (-) 1 (=) Total Return [ 251.8% ] Prior price dividend adjustment factor is 1.00.
What was Warren Buffett's best investment? ›
Buffett's Top Holdings
- Apple, Inc. ( AAPL)
- Bank of America (BAC)
- American Express (AXP)
- Chevron (CVX)
- Coca-Cola (KO)
- Kraft Heinz (KHC)
- Occidental Petroleum (OXY)
What bonds have a 10 percent return? ›
Junk Bonds
Junk bonds are high-yield corporate bonds issued by companies with lower credit ratings. Because of their higher risk of default, they offer higher interest rates, potentially providing returns over 10%. During economic growth periods, the risk of default decreases, making junk bonds particularly attractive.
What stocks has Nancy Pelosi bought recently? ›
Here are Nancy Pelosi and her husband's eight most recent stock purchases:
- Palo Alto Networks Inc. (ticker: PANW)
- Nvidia Corp. (NVDA)
- Apple Inc. (AAPL)
- Microsoft Corp. (MSFT)
- Alphabet Inc. (GOOG)
- Tesla Inc. (TSLA)
- AllianceBernstein Holding LP (AB)
- Walt Disney Co. (DIS)
Warren Buffett once said, “The first rule of an investment is don't lose [money]. And the second rule of an investment is don't forget the first rule. And that's all the rules there are.”
What is the Buffett's two list rule? ›
Buffett presented a three-step exercise to help streamline his focus. The first step was to write down his top 25 career goals. In the second step, Buffett told Flint to identify his top five goals from the list. In the final step, Flint had two lists: the top five goals (List A) and the remaining 20 (List B).
What are the 5 golden rules of investing? ›
The golden rules of investing
- If you can't afford to invest yet, don't. It's true that starting to invest early can give your investments more time to grow over the long term. ...
- Set your investment expectations. ...
- Understand your investment. ...
- Diversify. ...
- Take a long-term view. ...
- Keep on top of your investments.
How to be a millionaire in 5 years? ›
Here are seven proven steps to get you wealthy in five years:
- Build your financial literacy skills. ...
- Take control of your finances. ...
- Get in the wealthy mindset. ...
- Create a budget and live within your means. ...
- Step 5: Save to invest. ...
- Create multiple income sources. ...
- Surround yourself with other wealthy people.
What are the 4 index funds to retire a millionaire? ›
Getting down to business. You can build a powerful, global portfolio with these four Vanguard ETFs: Vanguard Total Stock Market ETF (NYSEMKT: VTI), Vanguard Total International Stock ETF (NASDAQ: VXUS), Vanguard Total Bond Market ETF (NASDAQ: BND), and Vanguard Total International Bond ETF (NASDAQ: BNDX).
What stocks will make you a millionaire in 5 years? ›
For this article we scoured various analyst reports and interviews to pick 11 stocks that experts believe can make one rich in the next 5-10 years.
- Freeport-McMoRan Inc (NYSE:FCX)
- Comcast Corporation (NASDAQ:CMCSA) ...
- AES Corp (NYSE:AES) ...
- Tarsus Pharmaceuticals Inc (NASDAQ:TARS) ...
- ChargePoint Holdings Inc (NYSE:CHPT) ...
What companies consistently outperform the S&P 500? ›
Those companies are Microsoft, Apple, Nvidia, Amazon, Alphabet, Meta Platforms, Berkshire Hathaway, Tesla, Broadcom, and Eli Lilly.
What investor has outperformed Warren Buffet? ›
Eight longstanding managers who have beaten Buffett
Fund or trust | Manager(s) | % Total return |
---|
Rathbone Global Opportunities | James Thomson | 980 |
AXA Framlington American Growth | Stephen Kelly | 909 |
FSSA Greater China Growth | Martin Lau | 880 |
European Opportunities Trust | Alexander Darwall | 875 |
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How many investors outperform the S&P 500? ›
According to Morningstar Direct, just 18.2% of actively managed funds whose primary prospectus benchmark is the S&P 500 managed to outperform the index in the first half of this year.
How reliable is the Buffett indicator? ›
If you looked at major market declines in the US since 1971, this indicator gave warning signals ahead of 50% of them. But if you came further and looked at data since 2000, then the Buffett Indicator successfully predicted about 57% of the major market declines.