The median income among full-time workers was about $4,700 per month in the second quarter, according to the Bureau of Labor Statistics. Many financial advisors would have workers allocate that income using the 50/30/20 rule, which apportions 50% to essential purchases (needs), 30% to discretionary purchases (wants), and 20% to savings.
Assuming taxes take 30% of gross income, 20% of after-tax income means the median full-time worker should be saving about $650 per month. Not all of that money needs to go to the same place. High-yield savings accounts are worthwhile options for those building up an emergency fund, for example, while individual stocks are worth exploring for anyone willing to do the requisite research.
However, legendary investor Warren Buffett would almost certainly recommend allocating a good chunk of that sum to an S&P 500 index fund like the Vanguard S&P 500 ETF (VOO 1.00%). He has been pounding the table on that strategy for years, and he once illustrated his conviction by wagering $500,000 that no hedge fund manager could outperform an S&P 500 index fund over a decade. Buffett won that bet.
Here's what investors should know.
Why Warren Buffett likes S&P 500 index funds
The Vanguard S&P 500 ETF measures the performance of 500 large-cap companies. Its constituents span all 11 stock market sectors, covering about 80% of the U.S. stock market and 50% of the global equities market. In other words, the Vanguard S&P 500 ETF allows investors to diversify their capital across many of the most influential businesses in the world.
The chart below shows the weighted exposure of the top 10 positions in the index fund as of Oct. 8, 2023.
Chart by Author.
Buying shares of the Vanguard S&P 500 ETF is like purchasing a slice of the U.S. economy, and Warren Buffett sees that as a compelling investment thesis. The U.S. economy is the most valuable and arguably the most innovative economy on the planet: 13 of the 15 largest public companies in the world are U.S. companies.
Buffett believes the U.S. economy will continue to create wealth for many years to come. He wrote the following in his 2015 letter to Berkshire Hathaway shareholders: "For 240 years it's been a terrible mistake to bet against America, and now is no time to start. America's golden goose of commerce and innovation will continue to lay more and larger eggs."
How a monthly investment of $300 could grow into $618,900
The S&P 500 returned 164% over the last decade, or about 10% per year. At that pace, $300 invested monthly in an S&P 500 index fund would be worth about $60,000 in one decade, $215,400 in two decades, and $618,900 in three decades.
Of course, some investors may wish to contribute a little less or a little more. The chart below details how different monthly sums would grow over time, assuming annual returns of 10%.
|
Holding Period |
$200 per month |
$400 per month |
$600 per month |
|---|---|---|---|
|
10 years |
$40,000 |
$80,000 |
$119,900 |
|
20 years |
$143,700 |
$287,300 |
$431,000 |
|
30 years |
$412,600 |
$825,100 |
$1.2 million |
Chart by Author. Note: Dollar totals are rounded to the nearest $100.
As shown above, patient investors can build a million-dollar portfolio (or even a multimillion-dollar portfolio) by regularly putting money into an S&P 500 index fund.
History says the S&P 500 is a surefire investment
The S&P 500 has been a consistent moneymaker throughout history. The index has never failed to produce a positive return over any rolling 20-year period since its inception in 1957, and its predecessor never failed to produce a positive return over any rolling 20-year period since its inception in 1928. Investors can be confident this trend will hold going forward.
Investors have several good options when it comes to S&P 500 index funds, but the Vanguard S&P 500 ETF is particularly attractive given its below-average expense ratio of 0.03%, meaning the annual fees on a $20,000 portfolio would total just $6.
Finally, investors don't have to choose between individual stocks and an S&P 500 index fund. Recall the median worker should be saving about $650 per month. They can split that money between individual stocks and the Vanguard S&P 500 ETF. Doing so would leave room for outperformance if their individual stocks beat the market. At the same time, the S&P 500 and its steady long-term track record can provide a safety net.
