Investing in exchange-traded funds (ETFs) is a fantastic way to generate wealth. ETFs require a fraction of the time and research involved in buying individual stocks, yet with the right strategy, they could make you a millionaire.
Each ETF has unique strengths and weaknesses, but there's one fund in particular that has gained the approval of famed investor Warren Buffett. In Buffett's own words, this ETF is "the best thing" for most investors. Here's how $200 per month could transform into $1 million or more.
Image source: The Motley Fool.
A safe yet powerful investment
If you're looking for an investment that can protect your savings while still growing exponential wealth, the S&P 500 ETF may be a fantastic addition to your portfolio.
An S&P 500 ETF tracks the S&P 500 index (^GSPC 0.16%). While there are many S&P 500 ETFs to choose from -- such as the Vanguard S&P 500 ETF (VOO 0.11%) or iShares Core S&P 500 ETF (IVV 0.15%) -- they all include stocks from the 500 companies within the index itself.
In Berkshire Hathaway's 2020 annual meeting, Warren Buffett explained that while investors have many options, "for most people, the best thing to do is to own the S&P 500 index fund." There's good reason behind that claim, as this ETF provides a slew of advantages:
- Immediate diversification: The S&P 500 contains stocks from 500 of the largest and strongest companies in the U.S. across all sectors of the market. That level of diversification can better protect against risk, because if a few stocks or even an entire industry takes a hit, it won't sink your entire portfolio.
- A flawless track record of success: Historically, there's never been a downturn from which the S&P 500 hasn't recovered. In fact, in a study from Crestmont Research, there's never even been a single 20-year period throughout the index's history in which it hasn't earned positive total returns. In other words, if you'd invested in an S&P 500 ETF at any point and held it for 20 years, you'd have made money.
- Minimal effort required on your part: An S&P 500 ETF is a fantastic all-in-one investment for many people. Because it's so diversified and performs best when left for decades to grow, you don't need to do much to maintain it. You never need to research individual stocks or decide when to buy or sell, which can be an appealing perk for those looking for a "set it and forget it" type of investment.
Despite the fact that the S&P 500 ETF is one of the safest investments out there, it can still pack a punch when it comes to earnings. With enough time and consistency, you could earn well over $1 million with this type of investment.
Transforming $200 per month into $1 million
Of course, nobody can say for certain how the S&P 500 will perform in the future. Historically, though, the index has earned a compound annual growth rate of around 10% per year. While you very likely won't see 10% returns every single year, your annual returns will generally average out to around 10% per year over decades.
Let's say you're investing in an S&P 500 ETF and earning a 10% average annual rate of return. Depending on how many years you have to let your money grow, here's approximately what you'd need to invest each month to reach $1 million in total savings:
| Number of Years | Amount Invested per Month | Total Portfolio Value |
|---|---|---|
| 20 | $1,500 | $1.031 million |
| 25 | $850 | $1.003 million |
| 30 | $525 | $1.036 million |
| 35 | $325 | $1.057 million |
| 40 | $200 | $1.062 million |
Data source: Author's calculations via investor.gov.
The more time you have to invest, the less you'll need to contribute each month to reach millionaire status. No matter how much you can afford to save each month, it's wise to get started as soon as possible to take full advantage of this valuable time.
Building a million-dollar portfolio isn't easy, but it's simpler and more straightforward than it might seem. If you're looking for a hands-off investment that can help you generate wealth while barely lifting a finger, the S&P 500 ETF might be a fantastic match.
