Warren Buffett is one of the most successful investors in American history and one of the most respected figures on Wall Street. Under his leadership, Berkshire Hathaway's Class A shares have returned nearly 20% annually since the mid-1960s. Comparatively, the S&P 500 (^GSPC 0.20%) has compounded at about 11% annually, including dividends, over the long term.

Interestingly, while many investors avidly track which stocks Buffett buys and sells, they often ignore one of his most prudent recommendations. "In my view, for most people, the best thing to do is to own the S&P 500 index fund," Buffett said at Berkshire's annual meeting in 2021. He has repeated that advice multiple times and has specifically suggested the Vanguard S&P 500 ETF (VOO 0.13%).

Here's how Buffett's advice could turn $450 invested monthly into $976,700 over three decades.

The Vanguard S&P 500 ETF provides heavy exposure to stocks like Apple, Microsoft, and Nvidia

The Vanguard S&P 500 ETF tracks the performance of 500 large U.S. companies, including value stocks and growth stocks from all 11 stock market sectors. It covers 80% of domestic equities and 50% of global equities by market value, letting investors diversify capital across some of the most important businesses in the world. The 10 largest positions in the index fund are listed by weight below:

  1. Apple: 7.3%
  2. Microsoft: 6.6%
  3. Nvidia: 6.1%
  4. Alphabet: 3.6%
  5. Amazon: 3.6%
  6. Meta Platforms: 2.6%
  7. Berkshire Hathaway: 1.7%
  8. Broadcom: 1.6%
  9. Tesla: 1.5%
  10. Eli Lilly: 1.4%

As mentioned, Warren Buffett believes an S&P 500 index fund is the best way for most people to invest in stocks. That doesn't mean investors should avoid individual stocks, but rather that a large portion of their portfolios should be allocated to an S&P 500 index fund. And there are three big reasons why that strategy is sensible.

First, professional money managers struggle to beat the S&P 500. In fact, less than one-tenth of large-cap funds managed to outperform the index over the last decade. "Huge institutional investors, viewed as a group, have long underperformed the unsophisticated index-fund investor who simply sits tight for decades," Buffett wrote in his 2014 shareholder letter.

Second, the S&P 500 has consistently delivered superior returns compared to other asset classes. The index compounded at 13% annually over the last decade, topping the average return generated by fixed income, international stocks, real estate, and precious metals, according to Morgan Stanley. The same pattern has been observed over the last two decades.

Third, the S&P 500 has consistently made patient investors wealthier. In fact, the index has been a profitable investment over every 16-year period since its inception in 1957, according to Bespoke Investment Group. That means investors who patiently hold an S&P 500 index fund for at least 16 years are virtually guaranteed to make money.

A person dropping a coin into a piggy bank, beside which are ascending stacks of coins and a clock.

Image source: Getty Images.

How the Vanguard S&P 500 ETF could turn $450 per month into $976,700

The S&P 500 returned 2,150% over the last three decades, which equates to an annual return of 10.9%. That aligns with the long-term average of 11% annually, according to Goldman Sachs. However, I will assume a more conservative return of 10.5% annually to introduce a margin of safety. At that pace, here's what $500 invested monthly in the Vanguard S&P 500 ETF would be worth after different holding periods:

  • 10 years: $88,100
  • 20 years: $327,400
  • 30 years: $976,700

The last item of consequence is the expense ratio. The Vanguard S&P 500 ETF carries a below-average low expense ratio of 0.03%. That means investors will pay just $0.30 annually on every $1,000 invested in the index fund. Comparatively, the average expense ratio across U.S. index funds was 0.36% in 2023, according to Morningstar.

Here's the bottom line: Buffett has repeatedly recommended an S&P 500 index fund for good reason. The index tracks some of the most influential companies in the world, and funds that track the index -- like the Vanguard S&P 500 ETF -- have been reliable ways for patient investors to make money in the stock market.