Many people share the goal of building long-term wealth, but it's not always easy to achieve. According to the Federal Reserve's most recent Survey of Consumer Finances data, the median net worth among U.S. households is around $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 could also take thousands of dollars and countless hours of research just to get started.
However, some investments require far less effort yet can still pack a punch. Whether you're new to the stock market or are looking for a no-fuss investment to help you make a lot of money while barely lifting a finger, this Warren Buffett-approved index fund could be a fantastic option.
A tried-and-true investment strategy
Warren Buffett may be one of the most famous investors of all time. Yet 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 view, for most people, the best thing to do is to own the S&P 500 index fund," he said in the 2020 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).
Back 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 10 years. After a decade, his investment had earned total returns of nearly 126%. The five actively managed funds earned an average return of only 36% in that time.
Building wealth with practically zero effort
An S&P 500 index fund tracks the S&P 500 index (SNPINDEX: ^GSPC) itself, which means it includes the same stocks as the index and aims to mirror its performance over time. The S&P 500 contains stocks from 500 of the largest companies in the world, and by investing in just one index fund, you'll instantly own a stake in all of those stocks.
Perhaps the best perk of the S&P 500 index fund is that it requires next to no effort. All of the stocks within the fund are chosen for you, and index funds perform best when given as much time as possible to grow -- ideally, decades.
In other words, all you need to do is invest consistently, then simply wait for your investment to start earning returns. It may take years or even a decade or two to see significant earnings, but you're all but guaranteed to see positive returns over time.
In fact, research shows that it's nearly 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 20-year total returns and found that every single 20-year period in the index's history has ended in positive gains, regardless of how volatile those periods were.
Turning $200 per month into $332,000 or more
Consistency is key to building wealth in the stock market, but you don't need to invest thousands of dollars per month to see substantial gains. Sometimes, just a couple hundred dollars can go a long way.
Historically, the S&P 500 has earned an average rate of return of around 7% per year. This means that while you very likely won't see 7% returns each and every year, the annual returns have averaged out to roughly 7% per year over several decades.
If you were to invest $200 per month while earning a 7% average annual return, here's approximately how much you could accumulate depending on how many 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 vis investor.gov.
It would take around 35 years of consistent investing to reach $332,000 in total savings, but if you have even a few more years to invest, you could potentially earn significantly more. Time is an incredibly valuable asset when investing, so the sooner you get started, the easier it will be to build long-lasting wealth.
The S&P 500 index fund can be a fantastic choice for beginner investors as well as those who simply want to grow their wealth with less effort. By getting started now and investing consistently, you could earn more than you might think over time.
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Katie Brockman has positions in Vanguard S&P 500 ETF. The Motley Fool has 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 per Month Into $332,000 With Practically Zero Effort was originally published by The Motley Fool