If you're ready to start investing in the stock market, give yourself a pat on the back. Investing remains one of the most effective and attainable ways to make money over time, and getting started is the first step toward building life-changing wealth.
However, choosing the right investments can be daunting. There are countless stocks and funds to choose from, and if you invest in the wrong places, it could cost you.
Fortunately, there are some investments that fit nearly every portfolio -- and you don't need to be an expert to see significant gains over time. There's one fund in particular that has not only earned the Warren Buffett seal of approval, but it could also help you turn $200 per month into $650,000 or more while barely lifting a finger.
Image source: The Motley Fool.
Maximizing your earnings with ETFs
Exchange-traded funds (ETFs) can be a fantastic option for beginners and advanced investors alike. An ETF is a bundle of securities grouped together into a single investment, so by investing in just one share of an ETF, you'll instantly own a stake in many different stocks at once.
Some ETFs are broader, tracking multiple industries or even the stock market as a whole. Others are more niche, including stocks from specific sectors or smaller subsets of the market.
One of the most popular types of funds is the S&P 500 ETF. This fund tracks the S&P 500 (^GSPC +0.46%) and includes 500 large-cap stocks across a wide variety of industries. The S&P 500 is one of the primary benchmarks of the overall market, and while you can't invest in the index itself, this ETF is as close as you can get.
Even Warren Buffett swears by this type of investment, and through his holding company Berkshire Hathaway, he owns two funds himself: the Vanguard S&P 500 ETF (VOO +0.45%) and the SPDR S&P 500 ETF Trust (SPY +0.44%).
NYSEMKT: VOO
Key Data Points
Back in 2008, Buffett even bet $1 million that an S&P 500 fund could outperform a group of actively managed funds over time. He not only won that bet, but he trounced the competition. His investment earned total returns of nearly 126% over 10 years, compared to the five hedge funds' average return of just 36% in that time.
Advantages of an S&P 500 ETF
The S&P 500 is a simple, straightforward investment that can help you earn a lot of money over time with minimal effort.
Because all the stocks in the fund are chosen for you, this type of investment is far less research-intensive than buying individual stocks. It's also much more cost-effective, as you can build a diverse portfolio with just one fund as opposed to buying 20 to 30 separate stocks.
The S&P 500 ETF is also a fantastic long-term investment. It performs best when left alone for several years or, ideally, decades. All you have to do is invest consistently and hold your investment for as long as possible, and the fund takes care of the rest for you.
Turning $200 per month into $650,000 or more
There are never any guarantees in the stock market, and nobody can say for certain how any investment will perform. Historically, though, the market itself has earned an average rate of return of around 10% per year.
It's highly unlikely you'll earn 10% returns year after year. But over the last several decades, the market's annual returns have averaged out to roughly 10% per year. At that rate, if you were to invest $200 per month, here's approximately how it would add up over time:
| Number of Years | Total Portfolio Value |
|---|---|
| 20 | $137,000 |
| 25 | $236,000 |
| 30 | $395,000 |
| 35 | $650,000 |
Data source: Author's calculations via investor.gov.
To reach $650,000 in total savings, you'd need to invest consistently for around 35 years. If you can afford to invest for longer than that or contribute more per month, you could increase your earnings substantially.
For example, giving your money just five more years to grow could take you from $650,000 to a whopping $1.062 million, all other factors remaining the same. Not everyone has 40 years to save, of course, but the earlier you begin investing, the more you can potentially earn (with much less effort).
Investing in an S&P 500 ETF can be a fantastic way to generate long-term wealth with little effort, whether you're new to the stock market or simply prefer a no-fuss investment. By investing as much as you can afford each month and giving your money plenty of time to grow, you'll be on your way to generating hundreds of thousands of dollars or more.
