Many people share the goal of building long-term wealth, but achieving it is not always easy. According to the most recent data from the Federal Reserve’s Survey of Consumer Finances, the average net worth of U.S. households is about $192,000.
Investing in the stock market is one of the more accessible ways to generate wealth, but it can be intimidating at times. Depending on where you invest, it can also take thousands of dollars and countless hours of research to get started.
However, some investments require much less effort and can still pack a punch. Whether you’re new to the stock market or looking for a no-hassle investment that can make you big money while barely lifting a finger, this Warren Buffett-endorsed index fund could be a fantastic option.
A proven investment strategy
Warren Buffett is perhaps one of the most famous investors of all time. Still, his advice to those getting started in the stock market is simpler than you might think: Invest in an S&P 500 index fund.
“In my opinion, the best thing for most people to do is own the S&P 500 index fund,” he said in the 2020 paper. Berkshire Hathaway annual meeting. Through Berkshire Hathaway, Buffett also owns two S&P 500 funds: the Vanguard S&P 500 ETF (NYSEMKT: VOO) and the SPDR S&P 500 ETF Trust (NYSEMKT: SPY).
In 2008, he also put his money where his mouth was by betting that an S&P 500 index fund could outperform a group of hedge funds over a ten-year period. After ten years, his investment had generated a total return of almost 126%. The five actively managed funds achieved an average return of just 36% during that time.
Build wealth with virtually no effort
An S&P 500 index fund tracks the S&P 500 index (SNPINDEX: ^GSPC) itself, meaning it contains the same stocks as the index and aims to reflect its performance over time. The S&P 500 contains stocks of 500 of the largest companies in the world, and by investing in just one index fund, you instantly own a share of all of them.
Perhaps the best benefit of the S&P 500 index fund is that it requires virtually no effort. All the stocks in the fund are chosen for you, and index funds perform best when given as much time to grow as possible – ideally decades.
In other words, all you have to do is invest consistently and then just wait for your investment to start yielding returns. It may take years or even a decade or two to make significant gains, but you’re almost guaranteed to make positive returns over time.
In fact, research shows that it is virtually impossible to lose money with an S&P 500 index fund as long as you hold your investment for at least 20 years. Investment research firm Crestmont Research analyzed the S&P 500’s total returns over a 20-year period and found that every 20-year period in the index’s history has ended in positive gains, no matter how volatile those periods were.
Turning €200 per month into €332,000 or more
Consistency is the key to building wealth in the stock market, but you don’t have to invest thousands of dollars a month to see substantial gains. Sometimes a few hundred dollars can go a long way.
Historically, the S&P 500 has averaged returns of about 7% per year. This means that while you most likely won’t see a 7% return every year, the annual return over decades will average about 7% per year.
If you were to invest $200 per month while earning an average annual return of 7%, this is approximately the amount you could accumulate depending on the number of years you can let your money grow:
|
Number of years |
Total portfolio value |
|---|---|
|
20 |
$98,000 |
|
25 |
$152,000 |
|
30 |
$227,000 |
|
35 |
$332,000 |
|
40 |
$479,000 |
Data source: Author’s calculations on investor.gov.
It would take about 35 years of consistent investing to reach a total savings of $332,000, but if you have a few more years to invest, you could potentially earn significantly more. Time is an incredibly valuable asset when investing, so the sooner you start, the easier it will be to build long-lasting wealth.
The S&P 500 Index Fund can be a great choice for novice investors, as well as for those who simply want to grow their wealth with less effort. By getting started now and investing consistently, you can earn more over time than you might think.
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Katie Brockman holds positions in Vanguard S&P 500 ETF. 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 Index Fund could turn $200 a month into $332,000 with virtually zero effort. Originally published by The Motley Fool
