Warren Buffett’s Simple Path to Wealth: Invest in the S&P 500
Warren Buffett is famous for his ability to choose stocks, picking top-notch companies at reasonable prices and holding them for years. His strategy has propelled Berkshire Hathaway to an astounding compounded annual gain of nearly 20% over the last 58 years, significantly outpacing the approximately 10% growth of the S&P 500 index.
However, Buffett champions another investment approach that is much simpler than stock picking. This method requires no extensive research or specialized knowledge about specific companies or industries. It has been a proven winner over time. Buffett actually owns this asset, which complements his selective stock portfolio, and recommends it as the best investment for casual investors. If history is any indicator, investing in this asset could potentially grow a monthly contribution of $300 into $1 million. Let’s explore further.
Investing in S&P 500 Index Funds
So, what is Buffett’s preferred strategy? It involves investing in an S&P 500 Index fund. This approach allows you to invest in all the companies that are driving the U.S. economy right now. Buffett has positions in the SPDR S&P 500 ETF Trust (NYSEMKT: SPY) and the Vanguard S&P 500 ETF. Both are solid investments, but we’ll focus on the SPDR fund for this example.
These funds mirror the companies in the S&P 500, maintaining the same weightings, and thus, they track the index’s performance. To ensure relevance, the index undergoes quarterly reviews. Recently, high-growth tech companies such as Palantir Technologies and Super Micro Computer were added to the list.
By investing in an S&P 500 index fund, your money is spread across today’s biggest market players and booming industries. Technology stocks, for instance, hold a weight of 32% in the index, representing the largest sector. Top holdings in the SPDR fund include Apple, Nvidia, and Microsoft, each constituting more than 6% of the fund’s portfolio.
This kind of investment provides ample diversification across 10 industries, allowing you to gain from strong performers without needing to become an expert in each one.
Wisdom from Warren Buffett
Buffett stated in a shareholder letter several years ago that non-professional investors should aim to “own a cross-section of businesses that in aggregate are bound to do well.” He emphasized that a low-cost S&P 500 index fund is key to achieving that goal. It’s essential to choose an ETF with low fees—preferably an expense ratio under 1%. The SPDR fund has a notably low ratio of 0.09%.
How can we reach that $1 million target? The answer lies in the power of compounding, which benefits from making monthly investments in the fund and staying committed over time. Suppose you start with an initial investment of $5,000 in the SPDR S&P 500 ETF Trust and then add $300 each month for 35 years.
On average, the S&P 500 has returned about 10% annually since it was first formed in the late 1950s. Should this trend hold, your total investment could exceed $1 million after 35 years. It’s a compelling strategy that requires little more than consistent monthly contributions.
If you’re concerned about not having $5,000 to invest right away or the ability to contribute $300 monthly, don’t fret. You can still follow this strategy, starting with as little as $500 and contributing $200 monthly, potentially yielding over $600,000 after 35 years.
Buffett has demonstrated his talent for stock picking, yet he still turns to S&P 500 investments to bolster his financial success. The great news is anyone—regardless of experience or wealth—can adopt this strategy and, like Buffett, work toward long-term wealth growth.
A Chance to Seize Potential Gains
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*Stock Advisor returns as of October 28, 2024
Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Berkshire Hathaway, Microsoft, Nvidia, Palantir Technologies, and Vanguard S&P 500 ETF. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.