ETFs
This Warren Buffett ETF makes becoming a millionaire investor as easy as possible
Building a million-dollar portfolio may seem like an impossible task. You might think that this requires complex investment strategies and sophisticated portfolio management. But only one investment recommendation from Warren Buffett This might be all you need to become a millionaire.
Buffett’s main recommendation to any investor, whether novice or experienced, is the same: a S&P500 index fund. He particularly likes the Vanguard S&P 500 ETF (NYSEMKT:VOO). He has good reason to recommend an index fund, even over his own company’s stocks, Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B), which he thinks it will continue to outperform the index, albeit slightly. Here’s why he loves the Vanguard S&P 500 ETF so much and how it can make you a millionaire investor.
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The best investment you can make
If you can only make one investment in your portfolio, Buffett suggests opting for an S&P 500 index fund. Even though he built his fortune by investing in individual companies, he says there can still be surprises. Sometimes a company performs better than expected, sometimes less well. And even when it performs as you expected, the market should price that performance the same way you hoped.
Of any individual investment, an S&P 500 index fund will produce the highest return “based on expectations,” Buffett wrote in his 2016 letter to shareholders. This is due to its low fees (Vanguard charges just 0.03 % of assets) and the diversification inherent in investing in an index fund.
Although you can spend time building a diversified portfolio of companies with above-average growth prospects, you can get a very good return from the index fund alone. The S&P 500 grew an average of 9.9% between 1928 and 2023. Even accounting for inflation, it produced a real total return of about 6.5%.
The hands-off investing approach can be a great foundation for building a million-dollar portfolio.
How to become a millionaire investor with just one ETF
If we use 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 a slow and steady approach and let compounding do most of the hard work of building a million-dollar portfolio. Someone nearing retirement may need to invest significantly more in their investment account to reach this milestone.
|
40 |
$185 |
|
35 |
$301 |
|
30 |
$494 |
|
25 |
$823 |
|
20 |
$1,409 |
|
15 |
$2,531 |
|
ten |
$5,030 |
|
5 |
$13,093 |
Source of the table: Author. Author’s calculations based on historical yield of 9.9%, compound.
The story continues
As you can see in the chart above, someone in their 20s or 30s can reach millionaire status by investing less than $500 per month. However, this becomes much more expensive as the timetable tightens. This highlights the power of composition.
Investing early also protects you from potential market volatility. Stock prices do not increase linearly month after month. It’s not uncommon for the S&P 500 to decline in a given month. Its value will decline approximately once every three years, and occasionally it can last an entire decade without producing positive real returns for investors. But in the very long term, as Buffett points out, nothing offers a better return in terms of life expectancy.
On this note, readers should also know that the table above is only an indication of how much you would need to invest to achieve a million dollar portfolio with the Vanguard S&P 500 ETF. Actual results will differ. If you get a good streak of returns, you’ll get well over a million dollars. A bad streak of returns yields less than a million dollars. If you need a million dollars to retire, it’s best to update your plan periodically based on how your portfolio has performed so far.
Finally, these guidelines are not adjusted for inflation. As we’ve seen over the past few years, inflation can quickly eat away at your purchasing power, meaning a million dollars won’t be enough as it used to be. And over a much longer horizon, inflation will certainly have a notable impact, even in normal economic times.
However, 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 has positions in and recommends Berkshire Hathaway and Vanguard S&P 500 ETF. The Mad Motley has a disclosure policy.
This Warren Buffett ETF makes becoming a millionaire investor as easy as possible was originally published by The Motley Fool