Warren Buffett has long touted the strengths of American companies. He's a firm believer in investing in the best the U.S. has to offer and holding on for the long term -- and this strategy has worked extremely well over time. As chairman and chief executive officer, he's helped Berkshire Hathaway outperform the S&P 500 over the past 59 years -- and this is thanks to big positions in American titans such as Apple, Bank of America, and Coca-Cola, just to name a few.
You could follow some of Buffett's specific stock picks, and they potentially could deliver gains for you, too. But the billionaire investor also has another way for you to win in the stock market -- and the great news is that it's effortless and has shown its strength over the years. In fact, Buffett says this strategy is an ideal one for non-professional investors.
On top of this, by regularly investing in this particular Buffett-approved asset, you amplify your gains. For example, you could turn $200 per month over a number of years into $1 million. Now may be the perfect time to get started on this plan. Let's take a closer look at this Warren Buffett favorite to buy.
Image source: The Motley Fool.
Buffett's view of American businesses
Back in his 2013 shareholder letter, Buffett spoke extensively about the benefits of investing in American businesses.
"In aggregate, American business has done wonderfully over time and will continue to do so (though, most assuredly, in unpredictable fits and starts)," Buffett wrote. The performance of indexes such as the Dow Jones Industrial Average and the S&P 500 support the billionaire's words, as they've always gone on to gain after tough periods.
The key is to remain invested over time to benefit -- if you don't take that long-term view and you sell too soon, you could either lose or only generate a small gain.
So, what's the best way to bet on these top American companies? Buffett recommends a low-cost index fund and suggests the Vanguard S&P 500 ETF (VOO -0.59%), an asset that he's even held in his own portfolio.
Buffett recommends this exchange-traded fund (ETF) because it offers you exposure to all of the major companies -- throughout industries -- that are driving today's economy. Since the index rebalances periodically, removing and adding new players according to their size and earnings strength, you'll continue to be invested in the movers and shakers of the time.
Investing in S&P 500 performance
How this works is very simple: The Vanguard S&P 500 ETF mimics the composition of the S&P 500 and therefore mimics its performance. As an investor in this fund, you'll pay a small fee, expressed as an expense ratio, as part of the deal. It's always best to stick with ETFs that have an expense ratio of less than 1% -- this fund's ratio of 0.03% makes it particularly inexpensive.
Now, let's consider how you can go from $200 per month to $1 million. The S&P 500 has delivered an average annual increase of 10% over time, so we'll imagine that trend continues. Then, we'll take advantage of compounding as we invest regularly in the same asset -- in this case, the Vanguard ETF -- for a number of years.
With this in mind, let's consider that we make an initial investment of $1,000 in the Vanguard ETF now, then invest $200 per month in it for 40 years. The total value of our investment would be $1.1 million at the end of that period. We would have contributed just under $100,000, showing the power of compounding and long-term investing.
Of course, it's impossible to predict market returns with 100% accuracy, so actual returns may differ to some degree -- but historically, the S&P 500 has shown itself to be a solid long-term investment.
Why buy now?
Why is now a great time to get going on this strategy? The S&P 500 slid over the past two months on concerns about President Donald Trump's import tariff plan -- but initial tariff deals are pointing to an easier tariff route ahead, and the index has rebounded. We may be heading for a new period of gains, and if you start investing now, you could benefit. That's a great way to get started -- but whether this fund does indeed continue to climb in the coming months or not, don't worry.
When you invest for the long term and, like Buffett, bet on solid U.S. companies, you're likely to score a win over the long run, and through the magic of compounding, you may even turn a monthly investment into $1 million.
