Building a million-dollar portfolio can seem like an impossible task. You might think this requires complex investment strategies and sophisticated portfolio management. But a single investment recommendation from Warren Buffett may be all you need to become a millionaire.
Buffett’s top recommendation for any investor, whether novice or seasoned veteran, is the same: S&P500 index fund. He especially likes the Vanguard S&P 500 ETF (NYSEMKT:VOO). He has good reasons for recommending an index fund, even over his own company’s stocks. Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B), which he believes will continue to outperform the index, albeit only slightly. Here’s why he loves the Vanguard S&P 500 ETF and how it can make you a millionaire investor.
The best investment you can make
If you can only make one investment in your portfolio, Buffett recommends choosing an S&P 500 index fund. Although he made his fortune investing in individual companies, he says you can still encounter surprises. Sometimes a company performs better than expected, sometimes worse. And even if it performs as you expected, the market should value that performance in the same way you expected.
Of any individual investment, an S&P 500 index fund will deliver the highest returns “based on expectations,” Buffett wrote in his 2016 letter to shareholders. This is due to the low costs (Vanguard charges only 0.03% of assets) and the inherent diversification of investing in an index fund.
While you could spend the time building a diversified portfolio of companies with above-average growth prospects, you could get very good returns from the index fund alone. The S&P 500 had an average return of 9.9% between 1928 and 2023. Even when adjusted for inflation, the index has delivered a real total return of about 6.5%.
The hands-off approach to investing can be an excellent foundation for building a million-dollar portfolio.
How to Become a Millionaire Investor with Just One ETF
Using the historical average return of 9.9% for the S&P 500, we can make rough estimates of how much you need to invest to become a millionaire. Of course, not everyone has the same time horizon. Someone in their 20s can afford the slow and steady approach and let compounded capital do most of the hard work of building a million-dollar portfolio. Someone nearing retirement may need to put a lot more into their investment account to reach that milestone.
|
Investment time horizon (years) |
Monthly contribution needed to reach $1 million |
|---|---|
|
40 |
$185 |
|
35 |
$301 |
|
30 |
$494 |
|
25 |
$823 |
|
20 |
$1,409 |
|
15 |
$2,531 |
|
10 |
$5,030 |
|
5 |
$13,093 |
Table source: Author. Calculations by author based on a historical return of 9.9%, compounded.
As you can see from the table above, someone in their 20s or 30s can reach millionaire status by investing less than $500 per month. However, it gets a lot trickier as the timeline shrinks. This underlines the power of compounding.
Investing earlier also protects you from potential market volatility. Stock prices don’t rise in a straight line month after month. It is not unusual for the S&P 500 index to decline in a given month. About once every three years its value will decline, and occasionally it can go an entire decade without delivering a positive real return to investors. But over the very long term, as Buffett notes, nothing delivers better returns based on expectations.
On that note, readers should also be aware that the table above is only a guideline for how much you would need to invest to achieve a million-dollar portfolio with the Vanguard S&P 500 ETF. Your actual results will vary. If you get a good set of returns, you’ll get a lot more than $1 million. A bad series of returns results in less than $1 million. If you need a million dollars to retire, it’s best to update your plan periodically based on how your portfolio has performed to date.
Finally, these guidelines are not adjusted for inflation. As we’ve seen in recent years, inflation can quickly eat away at your purchasing power, meaning $1 million won’t go as far as it used to. And over a much longer time horizon, inflation will certainly have a noticeable impact, even in normal economic times.
Nevertheless, the principle remains the same for Buffett. Investing in an S&P 500 index fund like Vanguard’s is not only an easy way to become a millionaire, but it’s also one of the smartest.
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Adam Levy has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Berkshire Hathaway and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
This Warren Buffett ETF Makes Becoming a Millionaire Investor as Easy as It Can Be was originally published by The Motley Fool
