Investors often turn to Warren Buffett for investment inspiration for one good reason: The billionaire, at the helm of Berkshire Hathaway, has helped drive market-beating gains for 59 years. Over that time period, the holding company has delivered a compound annual increase of nearly 20%.
That's compared to a compound annual gain of about 10% for the S&P 500. This is thanks to Buffett's stock-picking skills, but the Oracle of Omaha, as he's often called, also points out that investing in the S&P 500 is a wise move.
Though he's outperformed the index, he likes betting on the benchmark as a whole since it has offered investors solid returns over the long run. And due to the strength of its companies, it's likely to continue along that path.
How to invest in the index? By buying shares of a fund that tracks it. This is something Buffett has done in the past, and it's a move he recommends to others. Investors should aim to "own a cross-section of businesses that in aggregate are bound to do well," Buffett wrote in letter to shareholders several years ago. "A low-cost S&P 500 index fund will achieve this goal."
And this Buffett-approved investment may even turn a regular investment, such as $300 per month, into $1 million. Let's find out more.
Image source: The Motley Fool.
An easy way to bet on the S&P 500
The SPDR S&P 500 ETF Trust (SPY -0.64%) offers you a fantastic way to get in on the performance of the major benchmark. This exchange-traded fund mimics the S&P 500's composition and therefore delivers the same returns. And with this one purchase, you'll gain exposure to all of the top companies of the day.
If you have never purchased an ETF before, don't worry; ETFs trade daily on the market just like stocks, meaning you can buy shares of them as you would a stock.
The one thing to be aware of, though, before picking up an ETF is that this sort of asset comes with fees, expressed through an expense ratio. It's important to choose ETFs with expense ratios of less than 1% so that fees won't eat into your winnings. The SPDR S&P 500 ETF, with an expense ratio of 0.09%, fits the bill.
So, first, you may be wondering why Buffett is so enthusiastic about the S&P 500. This is due to his faith in strong American companies and the U.S. economy over time. He doesn't expect these players to soar during every trading session or the economy to flourish nonstop, but over the long run, he's confident that they'll deliver a win to investors.
"American business has done wonderfully over time and will continue to do so (though, most assuredly, in unpredictable fits and starts)," Buffett once wrote.
The weight of tech stocks
And since the S&P 500 rebalances quarterly, investors in a fund that tracks it are always guaranteed exposure to the major companies driving the economy of the time. Today, the top three holdings are tech giants Nvidia, Microsoft, and Apple. And 33% of the index and fund consist of tech stocks -- but weightings could change at any point if other companies and industries gain in market value.
All of this sounds good, and the S&P 500's average annual return of 10% over time suggests investors could score a win by purchasing shares of the SPDR S&P 500 ETF now and holding on for the long term. And the best news of all is that you could amplify that potential win by doing one particular thing, and that's harnessing the power of compounding.
Here's an example, considering the average annual return remains at 10%: If you make an initial investment in the ETF of $1,000 and then continue to invest $300 monthly in the fund, the value of your investment could reach more than $1 million after 35 years.
This doesn't mean you should forget about stock picking, though. Selecting individual stocks may offer you a chance to supercharge your winnings over time.
For instance, investors holding a top performer like artificial intelligence (AI) chip leader Nvidia directly will benefit from the gains more than those who are exposed to the stock through an ETF.
So, stock picking and ETF investing really are very complementary, and that's why, like Buffett, you may opt to include both in your investment strategy. And if you commit to monthly investments in the SPDR S&P 500 ETF, you may even find yourself with a million-dollar portfolio over the long run.
