Warren Buffett has earned a reputation as one of Wall Street's greatest investors. The many acquisitions and stock purchases he has engineered since assuming control of Berkshire Hathaway in 1965 have created immense wealth for shareholders. Berkshire stock has returned 20% annually over the last six decades, while the S&P 500 (^GSPC -1.13%) has gained 10.4% annually.
Nevertheless, I suspect many investors ignore one of his more prudent recommendations. Buffett has often advised investors to periodically buy and patiently hold an S&P 500 index fund. "I recommend the S&P 500 index fund, and have for a long, long time, to people," he said in 2021.
Here's how that advice could turn a $400 monthly investment into $851,800 over 30 years.
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The Vanguard S&P 500 ETF provides exposure to influential companies like Apple, Nvidia, and Tesla
The S&P 500 measures the performance of 500 large and profitable U.S. companies that cover about 80% of domestic equities and 50% of global equities by market value. The Vanguard S&P 500 ETF (VOO -1.22%) tracks the S&P 500, allowing investors to spread capital across many of the most influential businesses in the world.
The 10 largest positions in the Vanguard ETF are listed by weight below:
- Apple: 6.7%
- Microsoft: 6.2%
- Nvidia: 5.6%
- Amazon: 3.6%
- Alphabet: 3.5%
- Meta Platforms: 2.5%
- Berkshire Hathaway: 2.1%
- Broadcom: 1.9%
- Tesla: 1.6%
- Eli Lilly: 1.5%
Warren Buffett, in his 1993 letter to shareholders, wrote, "By periodically investing in an index fund, for example, the know-nothing investor can actually outperform most investment professionals." Indeed, only 15% of large-cap funds outperformed the S&P 500 over the last three years, meaning most professional money managers struggle to consistently beat the index.
Buffett added context in his 2016 shareholder letter. "American business -- and consequently a basket of stocks -- is virtually certain to be worth far more in the years ahead." An S&P 500 index fund satisfies that criterion. It is a readymade portfolio comprising hundreds of companies that form the foundation of the United States economy, which itself is the world's most prosperous and innovative large economy, according to JPMorgan Chase CEO Jamie Dimon.
Importantly, the Vanguard S&P 500 ETF has an expense ratio of 0.03%, meaning shareholders will pay $0.30 annually for every $1,000 invested in the fund. Comparatively, the average U.S. exchange-traded fund and mutual fund charged 0.34% last year, according to Morningstar.
The Vanguard S&P 500 ETF can turn $400 per month into $851,800 over three decades
The S&P 500 returned 1,860% in the last 30 years, equivalent to 10.4% annually. That period covers a broad range of market and economic environments, including more than a dozen corrections and three recessions, so investors can reasonably assume similar returns in the next 30 years.
With that in mind, assuming invested dollars compound at 10.4% annually, $400 contributed monthly to the Vanguard S&P 500 ETF would be worth $77,900 in one decade, $287,700 in two decades, and $851,800 in three decades.
Readers may wonder how to contribute $400 per month to the Vanguard S&P 500 ETF when the current share price is $549. There are two options. First, most brokerages support the purchase of fractional shares, meaning you could buy less than one share monthly. Second, for anyone who prefers to buy whole shares, you can simply add $400 to your account each month and make purchases as you accumulate sufficient cash.
Here's the bottom line: S&P 500 index funds (such as the Vanguard S&P 500 ETF) are a cheap and easy way for investors to gain exposure to hundreds of influential stocks, including Apple, Nvidia, and Tesla. Such investment products have created substantial wealth for patient shareholders in the past, and investors have every reason to believe the results will be similar in the future.
