Warren Buffett is one of the most accomplished businessmen in American history. Under his leadership, Berkshire Hathaway returned 19.8% annually to shareholders between 1965 and 2023, nearly doubling the return of the S&P 500 (^GSPC -0.07%). Meanwhile, Buffett amassed a fortune worth more than $127 billion.
Most of that money is invested in Berkshire Hathaway, but Buffett has never recommended the stock. Instead, he believes most investors should periodically purchase shares of 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 told attendees at Berkshire's annual meeting in 2021.
Investors should pay attention. That advice could turn $500 per month into $986,900 over the next three decades. Here are the important details.
The S&P 500 tracks the most influential businesses in the world
The S&P 500 tracks 500 U.S. companies that must meet specific inclusion criteria. First, they must have positive GAAP earnings in the most recent quarter and the last four quarters. Second, they must be worth at least $18 billion, and shares totaling half that amount must be available for public trading.
The S&P 500 covers approximately 80% of U.S. equities and 50% of global equities as measured by market capitalization, meaning it includes many of the most influential companies in the world. An S&P 500 index fund like the Vanguard S&P 500 ETF (VOO -0.01%) lets investors spread money across those companies.
The 10 largest positions in the Vanguard ETF are listed by weight below.
- Microsoft: 7%
- Apple: 6.3%
- Nvidia: 6.1%
- Alphabet: 4.2%
- Amazon: 3.6%
- Meta Platforms: 2.3%
- Berkshire Hathaway: 1.7%
- Eli Lilly: 1.5%
- JPMorgan Chase: 1.3%
- Broadcom: 1.3%
Warren Buffett sees an S&P 500 index fund as the best option for the average investor because it provides exposure to a "cross-section of businesses that in aggregate are bound to do well." In other words, investors that buy and hold shares of an S&P 500 index fund are all but guaranteed to make money over the long-term. Indeed, the S&P 500 has produced a positive return over every 20-year period in history.
The Vanguard S&P 500 ETF could turn $500 per month into $986,900
The S&P 500 surged 2,090% over the last three decades, compounding at 10.8% annually. Of course, past performance is never a guarantee of future results, but that period encompasses such a broad range of macroeconomic environments that similar returns are probable in the future.
Even so, I will assume the index compounds at 10% annually to introduce a margin of safety. At that pace, $500 invested monthly in the Vanguard S&P 500 ETF would be worth $95,600 in one decade, $343,600 in two decades, and $986,900 in three decades.
For investors that wish to save more or less than $500 per month, the chart below shows how different monthly contribution amounts would grow in the Vanguard S&P 500 ETF, assuming an annual return of 10%.
|
Holding Period |
$200 Per Month |
$400 Per Month |
$600 Per Month |
|---|---|---|---|
|
10 Years |
$38,200 |
$76,400 |
$114,700 |
|
20 Years |
$137,400 |
$274,900 |
$412,300 |
|
30 Years |
$394,700 |
$789,500 |
$1.1 million |
Source: Investor.gov compound interest calculator. Amounts have been rounded down to the nearest $100.
The last item of consequence is the expense ratio. The Vanguard S&P 500 ETF has an expense ratio of 0.03%, meaning investors will pay $3 per year for every $10,000 invested in the index fund. That means the Vanguard ETF is cheaper than the more heavily traded SPDR S&P 500 ETF Trust, which bears an expense ratio of 0.0945%.
The Vanguard S&P 500 ETF can complement a portfolio of individual stocks
The Vanguard S&P 500 ETF is a readymade portfolio. It includes value stocks and growth stocks from every market sector, and the underlying S&P 500 is a proven moneymaker. But investors need not choose between the Vanguard ETF and individual stocks. It is perfectly acceptable to own both. In fact, doing so limits underperformance, while leaving room for market-beating returns.
Investors that only buy individual stocks might outperform the S&P 500 by a wide margin. That would be an ideal outcome. But relying solely on individual stocks could also lead to substantial underperformance. That would be disheartening because anyone can match the S&P 500 by simply purchasing an index fund. Why waste time researching individual stocks only to generate worse returns?
Investors get the best of both worlds when they complement a portfolio of individual stocks with the Vanguard S&P 500 ETF. Their portfolio will beat the market if their stocks outperform, but their portfolio will still perform well if their stocks underperform, provided they have sufficient capital allocated to the S&P 500 index fund. Remember, the S&P 500 returned 10.8% annually over the last three decades, and similar results are likely in the coming decades.
