Building wealth in the stock market isn't always easy, but with the right investments, you could earn hundreds of thousands of dollars or more.
Warren Buffett is one of the most successful investors in the world, so it often pays to follow his lead when it comes to making money in the stock market. For the most part, Buffett's portfolio consists of individual stocks -- but there is one type of ETF he owns and widely recommends.
Image source: The Motley Fool.
ETFs, or exchange-traded funds, are baskets of securities bundled together into a single investment. By investing in just one ETF, you'll instantly own dozens or even hundreds of different stocks.
This particular ETF is known for being one of the safest out there, and it requires next to no effort on your end. Here's how it could turn just $200 per month into roughly $395,000 over time.
Buffett's most recommended investment
The only type of ETF in Buffett's portfolio is the S&P 500 ETF. Through his holding company, Berkshire Hathaway, he owns both the Vanguard S&P 500 ETF (VOO 1.00%) and the SPDR S&P 500 ETF Trust (SPY 0.95%).
The S&P 500 ETF tracks the S&P 500 index itself, meaning it includes the same stocks as the index and aims to mirror its long-term performance.
The S&P 500 contains stocks from 500 of the largest companies in the U.S., ranging from tech giants like Apple and Amazon to household names like Visa and Coca-Cola. When you own an S&P 500 ETF, you'll instantly own a stake in all 500 of these companies.
Buffett has long recommended low-cost index funds similar to these ETFs. "In my view, for most people, the best thing to do is to own the S&P 500 index fund," he said during Berkshire Hathaway's 2020 annual shareholders meeting.
Back in 2008, Buffett also famously bet $1 million that an S&P 500 fund could beat a collection of actively managed hedge funds. He easily won that bet, with his investment earning returns of nearly 126% over 10 years, while the five hedge funds averaged returns of just 36% in that time.
Perhaps one of the biggest advantages of the S&P 500 ETF, however, is that it's an extremely low-maintenance investment. There's no need to research individual stocks, keep up with industry trends, or decide when to buy or sell. Simply invest whatever you can afford, then sit back and wait for your money to grow.
Building a $400,000 portfolio
Of course, nobody knows how the market will perform in the future. But the S&P 500 has a long history of earning positive average returns, so it's likely an S&P 500 ETF will also experience growth over time.
Historically, the index itself has earned an average rate of return of around 10% per year. In other words, the returns each year have averaged out to roughly 10% annually over decades.
If you were to invest in an S&P 500 ETF while earning a 10% average annual return, here's approximately how far $200 per month could go depending on how many years you invest:
| Number of Years | Total Savings |
|---|---|
| 15 | $76,000 |
| 20 | $137,000 |
| 25 | $236,000 |
| 30 | $395,000 |
| 35 | $650,000 |
| 40 | $1,062,000 |
Data source: Author's calculations via Investor.gov
To accumulate $395,000 in savings, you'd need to invest consistently for around 30 years. But if you're able to give your money even a few more years to grow, you could earn exponentially more in total.
One of the downside of S&P 500 ETFs, however, is that they can only earn average returns. This type of investment is designed to follow the market, so it's impossible for it to beat the market. If earning above-average returns is a primary goal of yours, you may be better off investing in individual stocks.
You don't need to be a stock market expert to build wealth by investing. While the S&P 500 ETF won't be the right fit for everyone, if you're looking for a safer and more reliable long-term investment, it could be a fantastic addition to your portfolio.
