This Warren Buffett-Approved Investing Strategy Could Make You a Millionaire With Next to No Effort
Investing in the stock market is one of the best ways to build wealth that lasts a lifetime, but it can be intimidating to get started if you're not an experienced investor.
Buying individual stocks takes loads of research, as you'll need to study each company you're interested in to decide whether it's a strong investment. While this approach is a fantastic option for many people, it can be overwhelming for beginners or those who don't have a lot of time to devote to their portfolios.
Fortunately, there's a simpler way to invest in the stock market that requires very little time, money, and effort -- and it's even highly recommended by Warren Buffett. Here's everything you need to know.
Image source: The Motley Fool.
A simple yet powerful investment
If you're looking for a simple way to build wealth in the stock market with much less effort, the S&P 500 index fund may be your best bet.
An S&P 500 index fund tracks the S&P 500 (SNPINDEX: ^GSPC), so it includes the same stocks as the index and aims to mirror its performance over time. The companies within the S&P 500 are among the largest and strongest in the world, and by investing in this type of index fund, you'll own a stake in all 500 of these businesses.
Legendary investor Warren Buffett has long recommended the S&P 500 index fund for new and experienced investors alike, and in 2008, he even bet $1 million that this investment could outperform a group of five actively managed hedge funds.
Over 10 years, Buffett's S&P 500 index fund earned total returns of roughly 126%. The hedge funds, on the other hand, averaged returns of just 36% in that time.
One of the best advantages of the S&P 500 index fund, however, is that it's a passive investment. Because index funds track particular stock market indexes -- in this case, the S&P 500 -- you don't need to worry about choosing individual stocks. Index funds also generally offer much lower fees compared to actively managed mutual funds, which could save you thousands of dollars over time.
How safe is the S&P 500 index fund?
The market is famous for its volatility, which can be off-putting to new investors. While the S&P 500 is not immune to downturns, it has an impeccable track record of recovering from even the worst slumps.
In fact, if you hold your S&P 500 index fund for at least 20 years, you're all but guaranteed to make money. Analysts at Crestmont Research examined the S&P 500's historical performance, specifically its 20-year total returns. They found that every 20-year period in the index's history ended in positive total returns, regardless of how volatile the market was in those decades.
There's always a chance that more volatility is on the horizon, and we're bound to face another recession sooner or later. But the S&P 500 has a decades-long history of surviving even the most severe downturns, and while nothing is guaranteed in the stock market, it's extremely likely it will continue recovering from future crashes, too.
Earning $1 million or more
With enough time and consistency, it's possible to earn $1 million or more with this investment.
Since 1928, the S&P 500 itself has earned an average rate of return of around 8% per year. In other words, all of the annual highs and lows over the past century have averaged out to roughly 8% each year.
If you're investing in an S&P 500 index fund earning an 8% average annual return, here's what it might take to reach $1 million in total savings:
Number of Years | Amount Invested per Month | Total Portfolio Value |
|---|---|---|
20 | $1,900 | $1.043 million |
25 | $1,200 | $1.053 million |
30 | $750 | $1.020 million |
35 | $500 | $1.034 million |
40 | $325 | $1.010 million |
Data source: Author's calculations via investor.gov.
The sooner you get started investing, the easier it will be to accumulate $1 million or more. Even if you can't afford to invest hundreds of dollars per month, contributing whatever you can will still add up over time.
S&P 500 index funds are safer and more reliable investments that require less effort than buying individual stocks. By getting started now and investing consistently, you could earn more than you might think over time.
Should you invest $1,000 in S&P 500 Index right now?
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Katie Brockman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
