Billionaire Warren Buffett has guided Berkshire Hathaway to incredible success. The company's share price has grown twice as fast as the S&P 500 since he took control in 1965, due in large part to his abilities as a businessman and investor.
Somewhat surprisingly, Buffett does not recommend Berkshire stock. Instead, he has consistently told investors to buy an S&P 500 index fund. "I recommend the S&P 500 index fund, and have for a long, long time to people. And I've never recommended Berkshire to anybody," Buffett said at Berkshire's annual shareholder meeting in 2021.
That investment strategy may not be exciting, but it has been a surefire moneymaker for patient investors. Here's how the Vanguard S&P 500 ETF (VOO 1.00%) could turn $450 per month into $983,800 over three decades.
The Vanguard S&P 500 ETF tracks hundreds of influential U.S. stocks
The Vanguard S&P 500 ETF measures the performance of 500 large U.S. companies. The index fund provides exposure to value stocks and growth stocks from every market sector, and its constituents account for about 80% of U.S. equities and 50% of global equities by market capitalization. The top 10 holdings are detailed below.
- Microsoft: 7.2%
- Apple: 6.6%
- Alphabet: 3.7%
- Nvidia: 3.7%
- Amazon: 3.5%
- Meta Platforms: 2.1%
- Berkshire Hathaway: 1.7%
- Tesla: 1.3%
- Broadcom: 1.3%
- Eli Lilly: 1.3%
As detailed, the Vanguard S&P 500 ETF lets investors spread money across many of the most influential American businesses. Buffett finds that compelling. "American business -- and consequently a basket of stocks -- is virtually certain to be worth far more in the years ahead," he wrote in his 2016 shareholder letter.
The S&P 500 has consistently made money for patient investors
Buffett once said, "I do not think the average person can pick stocks." That has nothing to do with intelligence. Instead, Buffett believes most people lack the patience and dedication required to pick good stocks. Analyzing businesses is a skill that takes time to develop and there is simply no substitute for experience.
And even with time and practice, beating the S&P 500 is difficult. Even professional money managers struggle to overcome the odds and beat the market. Just 14% of large-cap funds outperformed the S&P 500 over the last five years, and only 8% outperformed the S&P 500 over the last 15 years, according to S&P Global.
Patience is the secret to making money in the S&P 500. The index may go up or down in any given year, but the odds of a positive return improve dramatically as the holding period lengthens. The S&P 500 has been a profitable investment over every rolling 20-year period since the index was created in 1957. In other words, buying and holding an S&P 500 index fund for at least 20 years has historically been a surefire path to profit.
The Vanguard S&P 500 ETF could turn $450 per month into $983,800 over three decades
The S&P 500 returned 1,800% over the last three decades, increasing at 10.3% annually. That period encompasses enough different market environments -- from economic booms to recessions -- that investors can reasonably assume similar results in the future.
In that scenario, $450 invested monthly would grow into $91,300 in one decade, $334,800 in two decades, and $983,800 in three decades, assuming an annual return of 10.3%.
Of course, some readers may not be able to save $450 per month and others may want to save more. To accommodate those situations, the chart below shows how different monthly contribution amounts would grow over time, assuming an annual return of 10.3%.
|
Holding Period |
$250 per Month |
$350 per Month |
$550 per Month |
|---|---|---|---|
|
10 years |
$50,700 |
$71,000 |
$111,600 |
|
20 years |
$186,000 |
$260,400 |
$409,200 |
|
30 years |
$546,600 |
$765,200 |
$1.2 million |
Calculations by author via mdm.ca. Dollar amounts have been rounded down to the next $100.
The last item of consequence is the expense ratio. The Vanguard S&P 500 ETF bears an ultra-low expense ratio of 0.03%, meaning the annual fee would be just $0.30 for every $1,000 invested in the fund. For context, the average expense ratio across mutual funds and ETFs was 0.47% in 2022.
That's just one more reason the Vanguard S&P 500 ETF is a compelling option. Investors would be hard-pressed to find cheaper alternatives with similar risk-reward profiles. Buffett is well aware of that, and it's why he has consistently recommended an S&P 500 index fund.
