The S&P 500 recently hit a new all-time high, confirming that we're in a new bull market. The index has now climbed more than 30% since its bear market low back in October of 2022. Since bull markets support growth, today is the perfect time to focus on pumping up your portfolio and paving the path for long-term gains. What should you do to maximize your portfolio's potential?
Take advice from investment giant Warren Buffett. As chairman of Berkshire Hathaway, the Oracle of Omaha, as he's often called, has helped deliver a compounded annual increase of nearly 20% over 57 years thanks to his excellent stock picks. But Buffett's billion-dollar portfolio also includes another asset type that he heartily recommends to other investors.
Buffett's portfolio holds two S&P 500 index funds, the SPDR S&P 500 ETF Trust (SPY 0.95%) and the Vanguard S&P 500 ETF (VOO 1.00%). And he thinks your portfolio could benefit from one of these funds that tracks the index's performance too. So, if growth is one of your New Year's resolutions, set aside $75 a month, and let's take a look at how it could turn into $50,000.
Building wealth over time
First, it's important to note that an index fund won't work magic overnight, but instead could help you build wealth over time. The idea is to invest regularly in the particular fund -- here we'll use the SPDR S&P 500 ETF as an example -- and reap the rewards several years down the road. You'll benefit from compounding, or the idea of gains producing more gains.
Before we get into the math behind all of this, though, let's consider why Buffett advises adding an index fund to a portfolio. Buffett wrote in his 2013 shareholder letter that he believes a long-term investment in an S&P Index fund would beat the returns achieved by most individual investors. That's why in his own will he requests a trustee place 90% of his cash, for the benefit of Buffett's wife, in an S&P 500 Index fund and 10% in short-term government bonds.
Stock picking is a wonderful way to generate wealth, and most quality companies will deliver rewards over time. But certain stocks may fall and never recover, and if an investor has invested too much in these players, that investor's returns could suffer. History shows us you don't have to worry about that when investing in an asset that tracks the S&P 500.
That's because the benchmark, even after the worst of bear markets, has rebounded and gone on to grow. In fact, the annual average return over 50 years for the market has been 10%. And the SPDR S&P 500 fund, since its creation, has tracked those movements.
Top quality companies
Why is the S&P 500 so successful? Because its most heavily weighted members are top-quality companies known to grow over time -- and by investing in an index tracker, you're getting access to all of these players. Today, the technology sector is the heaviest in the index -- and in funds that track it -- weighing more than 29% and including top companies like Apple and Amazon.
However the index and funds include many sectors and companies, and this diversification is another element that reduces risk and increases your chances of success.
| Industry | Weight in the SPDR S&P 500 ETF |
|---|---|
| Information technology | 29.85% |
| Financials | 12.88% |
| Healthcare | 12.72% |
| Consumer discretionary | 10.54% |
| Communication services | 8.82% |
| Industrials | 8.57% |
| Consumer staples | 6.07% |
| Energy | 3.67% |
| Real estate | 2.40% |
| Materials | 2.28% |
| Utilities | 2.22% |
| Source: State Street Global Advisors |
Of course, if you invest in an index fund for a short period, you could lose, but if you invest for the long term, you're very likely to win. By long term, I mean at least five years, but generally, the longer you stay invested, the more you increase your chances of winning big. Buffett has said his ideal investing period is "forever."
How this strategy could work for you
Now let's move on to the math and see how this could work for you. If you invest $75 every month in the SPDR S&P 500 for 20 years, considering the effect of compounding and assuming a 10% rate of return, you could grow your investment to more than $51,500. You would contribute a total of $18,000 for returns of more than $33,500.
And the good news is you don't have to invest a fortune every month. You easily could adjust your monthly investment up or down from the example I use above. Even a small budget is likely to produce excellent results over time, so this strategy could work for any investor.
Collecting tens of thousands of dollars in returns after a minimal monthly commitment sounds like a pretty good deal -- and definitely, a way to fulfill your 2024 New Year's resolution and start this new bull market off on the right foot, just like Warren Buffett.
