Warren Buffett has built his successes through his ability to pick a good stock. As chairman, he's led Berkshire Hathaway to a compounded annual gain of nearly 20% over 57 years thanks to investments in quality companies across industries, from financial to consumer goods. But one big piece of advice he has for investors isn't about stock picking.
In fact, he recommends an easy strategy that doesn't require you to study the market or particular players or buy and sell at just the right moment. It simply involves regular investing in one asset over a number of years. Could this advice help you become a millionaire? Let's find out.
Image source: The Motley Fool.
Is Buffett following his own advice?
So, first of all, what exactly does the billionaire investor recommend, and is it something he's doing himself? Buffett advises investors to buy shares over a long period in an index fund tracking the S&P 500 Index. And he not only owns shares of two of these funds -- the SPDR S&P 500 ETF Trust (SPY +0.29%) and the Vanguard S&P 500 ETF (VOO +0.28%) -- but he also speaks of a section in his will directing a trustee to put most cash into an S&P 500 index fund for Buffett's wife.
The idea here is that many of the world's top companies are included in the S&P 500, so by investing in it, you could benefit from their growth over time. The strategy offers you access to these leaders as well as instant diversification across industries. Diversification is a great thing because it lowers your risk -- for example, if a certain industry or stock falls out of favor, plenty of others are right there to limit losses.
The S&P 500 includes 11 sectors, with information technology, financials, and healthcare representing the three heaviest industries. And today, purchase of an index fund offers you ownership of top stocks including Nvidia, Amazon, and Eli Lilly & Co. Index funds mirror this composition so they can deliver the same performance as the index.
And history also has shown us that, over time, the index always comes out on top. As we can see in the chart below, even after difficult periods, it's always gone on to gain. The average annual return for the index is about 10% over the long term.
How this strategy can work for you
Now, let's see how an investment over time in such a fund can work out for you. We'll use the SPDR S&P 500 fund in our example, and we'll assume an average annual 10% return. If you invested $350 every month for a period of 35 years, your investment could grow to more than $1.1 million, making you a millionaire. You will have invested $147,000 over that time period, and you will collect more than $991,000 in returns.
Sounds like a pretty good deal -- but what if you don't have $350 to invest every month? The strategy may not make you a millionaire in this case, but even with a much smaller amount invested monthly, you might win big. If you steadily invested $50 on a monthly basis in the fund, the value of your investment could reach into six-figure territory at more than $162,000.
All of this is thanks to the magic of compounding, or gains creating additional gains, as well as the index's overall positive performance over time.
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Key Data Points
Of course, before you commit money monthly to an index fund, it's important to be sure the move won't put a strain on your ability to pay bills or address high-interest debt. But if you have extra cash you don't immediately need, this strategy could be a winning one for you over the long term.
So, let's get back to our original question: Could following this Warren Buffet advice help make you a millionaire? It's possible -- depending on how much you invest and how long you apply this strategy of monthly investing. And, coupled with other investments, you may get there too. Finally, even if you don't reach millionaire territory, this strategy might make you richer and help you achieve financial freedom -- and that's a very big win.
