Warren Buffett is one of the most successful investors in American history. Under his leadership, Berkshire Hathaway stock has advanced 5,900,000% during the last six decades, while the S&P 500 (^GSPC 0.41%) has returned about 43,000%. That makes Buffett a reliable source of inspiration, and he has regularly advised that investors buy an S&P 500 index fund.
"Over the years, I've often been asked for investment advice," Buffett wrote in his 2016 shareholder letter. "My regular recommendation has been a low-cost S&P 500 index fund." There are several funds that satisfy that description, but Buffett has specifically recommended the Vanguard S&P 500 ETF (VOO 0.41%).
This advice could turn $500 per month into $986,900 over 30 years. Here's what investors should know.
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The Vanguard S&P 500 ETF tracks the largest U.S. stocks
The Vanguard S&P 500 ETF measures the performance of the S&P 500, an index commonly viewed as the best benchmark for the entire U.S. stock market. The fund includes value stocks and growth stocks from all 11 stock market sectors and covers more than 80% of domestic equities and about 40% of global equities by market value.
In other words, the Vanguard S&P 500 ETF provides exposure to many of the largest companies in the world. The top 10 positions in the index fund are listed by weight below:
- Nvidia: 8%
- Microsoft: 7.3%
- Apple: 5.7%
- Amazon: 4.1%
- Alphabet: 3.7%
- Meta Platforms: 3.1%
- Broadcom: 2.5%
- Berkshire: 1.6%
- Tesla: 1.6%
- JPMorgan Chase: 1.4%
Warren Buffett imparted this advice at Berkshire's annual meeting in 2020. "In my view, for most people, the best thing to do is to own the S&P 500 index fund." He likes that strategy because it requires little-to-no work and has consistently made money over long periods.
The S&P 500 has achieved a positive return over every 15-year period since 1950. That means anyone who bought an S&P 500 index fund in the last 75 years made money, as long as they stayed invested for at least 15 years.
Buffett has also warned investors to avoid professional fund managers. "Huge institutional investors, viewed as a group, have long underperformed the unsophisticated index-fund investor who simply sits tight for decades," he wrote in his 2014 shareholder letter. Historical data backs that claim: Only 15% of large-cap funds beat the S&P 500 in the last decade.
How the Vanguard S&P 500 ETF could turn $500 per month into $986,900
The S&P 500 achieved a total return of 1,900% over the last three decades, which equates to average annualized gains of 10.5%. Past performance is no guarantee of future results, but that period encompasses such a broad range of economic and market conditions -- three recessions and four bear markets -- that investors can reasonably expect similar returns in the future.
Nevertheless, I will assume slightly more conservative gains of 10% annually to introduce a margin of safety. At that pace, $500 invested monthly in the Vanguard S&P 500 ETF would be worth $95,600 in one decade, $343,600 in two decades, and $986,900 in three decades.
The last discussion point of consequence is the expense ratio, which measures the fees charged by the issuer. The Vanguard S&P 500 ETF has a relatively cheap expense ratio of 0.03%, so shareholders will pay just $3 per year on every $10,000 invested in the fund. Investors would be hard-pressed to find a cheaper fund with a better track record.
As a final thought, investors need not choose between individual stocks and index funds. An S&P 500 ETF is a great foundation for almost any portfolio, so long as the goal is long-term gains. Personally, I split my money between individual stocks and the Vanguard S&P 500 ETF. By doing so, I will beat the market if my stocks outperform but still earn decent returns if my stocks underperform.
