If you've had dreams of becoming a millionaire someday, investing in the stock market is one of the simplest and most straightforward ways to do it. While the stock market can be intimidating at times (especially during periods of volatility), it's a money-making powerhouse. And with the right investments, you can keep your savings safer while still building wealth over time.
There's no single correct way to invest, as everyone will have different preferences. But there's one type of investment that legendary investor Warren Buffett swears by, and it could make you a millionaire with very little effort on your part: an S&P 500 exchange-traded fund (ETF).
A safe yet powerful investment
For the most part, Warren Buffett invests in individual stocks. But he does own two ETFs through his holding company, Berkshire Hathaway: the Vanguard S&P 500 ETF (VOO 1.00%) and the SPDR S&P 500 ETF Trust (SPY 0.95%).
Buffett often recommends this investment for new and experienced investors alike and once famously bet that it could outperform even the best hedge funds.
In 2008, Buffett bet $1 million that an S&P 500 fund could earn higher total returns than a group of five actively managed hedge funds. The result? The S&P 500 investment earned total returns of nearly 126% over 10 years, while the hedge funds averaged returns of just 36% in that time.
Despite being a powerful investment, an S&P 500 ETF is also one of the safer options out there. A few of its best advantages include:
- Instant diversification: Each S&P 500 ETF includes stocks from 500 companies across a wide variety of industries. By owning just a single ETF, then, you have a stake in hundreds of different stocks -- which significantly lowers your risk.
- The best of the best stocks: The stocks within the S&P 500 are from some of the strongest and healthiest companies in the U.S. There are high standards businesses need to meet to be included in the S&P 500, so these stocks are among the best of the best.
- A long track record of success: The S&P 500 has a decades-long history of earning positive returns over time. While nothing is guaranteed in the stock market, it's extremely likely this type of investment will recover from downturns and experience long-term growth.
Perhaps the biggest advantage of investing in an S&P 500 ETF, however, is that it requires next to no effort on your part. You never need to worry about researching companies, keeping up with industry trends, or deciding when to buy or sell. Simply invest whatever you can afford, then sit back and wait for your money to grow.
Reaching millionaire status
Again, there are never any guarantees when it comes to the stock market, so nobody can say for certain how this type of investment will perform over time. Historically, though, the S&P 500 has earned an average rate of return of around 10% per year.
It's unlikely you'll earn 10% returns each and every year. But over decades, the annual highs and lows should average out to roughly 10% annually.
If you have a goal of reaching $1 million and you're earning a 10% average annual return, here's approximately how much you'd need to invest each month, depending on how many years you have to let your money grow:
| Number of Years | Amount Invested per Month | Total Savings |
|---|---|---|
| 20 | $1,500 | $1.031 million |
| 25 | $900 | $1.062 million |
| 30 | $525 | $1.036 million |
| 35 | $325 | $1.057 million |
| 40 | $200 | $1.062 million |
Data source: Author's calculations via Investor.gov.
The more time you have to invest, the less you'll need to contribute each month to reach your goal. If you've been putting off investing, then, now is the perfect moment to get started.
One downside to consider before you buy
Despite all of its advantages, the S&P 500 ETF isn't perfect. One of the biggest downsides is that it can't earn above-average returns. It's designed to follow the market, so it's impossible for it to beat the market.
For many investors, lower returns are a worthwhile trade-off for the ease and simplicity of this investment. But if your goal is to earn as much as possible, individual stocks may be a better fit. This approach does require more research and effort, but if you invest well, you could potentially earn higher returns over time.
There's not necessarily a right or wrong way to invest, so where you choose to buy will depend on your preferences. If you're looking for an easy investment that can help you make a lot of money with little effort, an S&P 500 ETF could be a fantastic addition to your portfolio.
