Warren Buffett acquired an ownership stake in Berkshire Hathaway in 1965. The company has since seen its share price compound by 19.8% annually, easily outperforming the S&P 500 (^GSPC +1.02%), which returned 10.2% per year during the same period.
That outperformance is due in large part to Buffett's prodigious skill as an investor, but he has never recommended Berkshire stock. Instead, Buffett has consistently advised investors to periodically purchase shares of an S&P 500 index fund like the Vanguard S&P 500 ETF (VOO +0.98%).
That advice could turn $400 invested monthly into $904,100 over the next three decades. Here are the important details.
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Key Data Points
Why Warren Buffett likes S&P 500 index funds
The Vanguard S&P 500 ETF measures the performance of 500 large-cap U.S. companies. It includes growth stocks and value stocks from all 11 market sectors, and it covers more than 80% of domestic equities and nearly 40% of global equities by market capitalization. In short, the index fund offers exposure to many of the most influential companies in the world.
The 10 largest positions in the Vanguard S&P 500 ETF are detailed below. It's worth mentioning that the "Magnificent Seven" stocks account for 29% of the index fund by weight, so they factor heavily into its performance.
- Microsoft: 7.2%
- Apple: 6.2%
- Nvidia: 4.6%
- Amazon: 3.7%
- Alphabet: 3.5%
- Meta Platforms: 2.5%
- Berkshire Hathaway: 1.7%
- Eli Lilly: 1.4%
- Broadcom: 1.3%
- Tesla: 1.3%
Buffett believes an S&P 500 index fund is the best way for most investors to get exposure to the stock market. His rationale is rooted in three indisputable facts.
First, professional money managers struggle to consistently outperform the S&P 500. In fact, just 12% of large-cap funds beat the index over the last 15 years. Buffett highlighted that point in his 2014 letter to shareholders: "Huge institutional investors, viewed as a group, have long underperformed the unsophisticated index-fund investor who simply sits tight for decades."
Second, the S&P 500 has consistently outperformed most major asset classes, including the equity markets in Europe and Asia, as well as fixed income, real estate, and precious metals. That speaks to the strength of the U.S. economy and American innovation. Currently, 16 of the 20 largest companies in the world are American companies, and the U.S. stock market accounts for 45% of the global stock market.
Third, the S&P 500 has been a consistent moneymaker over long periods. In fact, the index has produced a positive return over every 20-year period since its inception in 1957, and its precursor was a profitable investment over every 20-year period since its inception in 1923.
How the Vanguard S&P 500 ETF could turn $400 per month into $904,100
The S&P 500 returned 1,970% over the last three decades, compounding by 10.6% annually. I will assume a more conservative return of 10% annually in the future to introduce a margin of safety. At that pace, $400 invested monthly would be worth $81,900 in one decade, $303,700 in two decades, and $904,100 in three decades.
Some investors may prefer to invest more, while other investors may not have $400 per month. Assuming returns of 10% annually, the table below illustrates how different monthly contribution amounts would grow over time.
|
Holding Period |
$100 per Month |
$200 per Month |
$600 per Month |
|---|---|---|---|
|
10 years |
$20,400 |
$40,900 |
$122,900 |
|
20 years |
$75,900 |
$151,800 |
$455,600 |
|
30 years |
$226,000 |
$452,000 |
$1.3 million |
Data source: Investor.gov compound interest calculator. The table assumes returns of 10% annually, and all totals have been rounded down to the nearest $100.
The last thing I want to mention is the expense ratio. The Vanguard S&P 500 ETF bears an ultra-low expense ratio of 0.03%, meaning investors will pay just $0.30 per year on every $1,000 invested in the index fund. For context, the average expense ratio on U.S. funds was 0.37% in 2022.
Here's the bottom line: The Vanguard S&P 500 ETF lets investors spread money across many of the most influential businesses in the world, including the Magnificent Seven stocks. Moreover, the benchmark index returned 10.6% annually over the last three decades, and it has always been profitable over time periods of at least 20 years. Those qualities make the Vanguard S&P 500 ETF a very compelling investment option, especially in combination with a portfolio of individual stocks.
