The end of the year can be a fantastic time to check in on your investments -- and perhaps even give your portfolio a boost by investing in more stocks or funds.
Exchange-traded funds (ETFs) can be a simple way to invest in dozens or even hundreds of stocks at once, making them an ideal choice for those who are short on time or would prefer to avoid spending countless hours researching individual stocks.
There are seemingly endless ETFs to choose from, all with their unique advantages and disadvantages. While there's no single right choice for everyone, there's one Warren Buffett-approved ETF that I'm stocking up on before the end of the year.
Image source: The Motley Fool.
A powerful investment that can protect your portfolio
One of Warren Buffett's most recommended investments is the S&P 500 ETF. This type of fund contains all the stocks within the S&P 500 (^GSPC +1.46%) itself, which includes 500 of the largest, strongest companies in the U.S.
Investing in just one share of an S&P 500 ETF will allow you to instantly buy into hundreds of stocks across a wide variety of industries. This can provide immediate diversification, limiting your risk with far less effort than buying a few dozen stocks individually.
Because the S&P 500 only includes large companies, all the stocks within the ETF are powerhouse businesses ranging from Apple, Amazon, and Nvidia, to Procter & Gamble, 3M, and Coca-Cola. If you're looking to gain exposure to industry leaders from all corners of the stock market, you can't go wrong with an S&P 500 ETF.
Gaining the Buffett seal of approval
Through Berkshire Hathaway, Buffett owns two of these types of funds: the Vanguard S&P 500 ETF (VOO +1.41%) and the SPDR S&P 500 ETF Trust (SPY +1.39%).
A few years ago, Buffett even put his money where his mouth was by making a $1 million bet that an S&P 500 fund could outperform a group of five actively managed hedge funds over a decade.
The results? His investment earned total returns of close to 126% in that time, while the hedge funds saw returns ranging from just 2.8% to 87.7%. Combined, the five hedge funds averaged returns of around 36% over 10 years.
In Berkshire Hathaway's letter to shareholders following the bet, Buffett noted:
There was nothing aberrational about stock market behavior over the 10-year stretch. Seizing the opportunities then offered does not require great intelligence, a degree in economics, or a familiarity with Wall Street jargon. What investors then need instead is an ability to both disregard mob fears or enthusiasms and to focus on a few simple fundamentals.
Earn hundreds of thousands of dollars over time
The S&P 500 ETF is a relatively safe investment, but it could still help you earn a lot of money with enough time and consistency.
Historically, the S&P 500 itself has earned an average rate of return of around 7% per year. A long-term outlook is key with this type of investment, as you're likely to see wide fluctuations in returns from year to year. But over decades, those annual ups and downs should average out to a more consistent figure.
Say you were to invest $200 per month in an S&P 500 ETF while earning 7% average annual returns. At that rate, here's approximately how those contributions would add up over decades:
| Number of Years | Total Portfolio Value |
|---|---|
| 20 | $98,000 |
| 25 | $152,000 |
| 30 | $227,000 |
| 35 | $332,000 |
| 40 | $479,000 |
Data source: Author's calculations via investor.gov.
The longer you allow your investments to grow, the more you can potentially earn. No matter how much you can afford to contribute each month, getting started sooner rather than later can increase your earnings exponentially.
As with any investment, time and consistency are key. The S&P 500 ETF can be a fantastic choice for those looking for a safer, more reliable investment, and getting started early is the most effective way to maximize your earnings. By taking full advantage of this Buffett-approved ETF, you could earn more than you might think over time.
