Building a million-dollar portfolio may feel like an impossible task. You might think it 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 experienced veteran, is the same: an S&P 500 index fund. He specifically likes the Vanguard S&P 500 ETF (NYSEMKT: VOO). He has good reason for recommending an index fund, even over his own company’s stock, Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B), which he believes will continue to outperform the index, albeit only slightly. Here’s why he likes the Vanguard S&P 500 ETF so much and how it can make you a millionaire investor.
The single 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. While he’s made his fortune by investing in individual businesses, he says you can still get surprises. Sometimes a company will perform better than expected, sometimes worse. And even when it performs as you anticipated, the market has to value that performance the same way you expected it to.
Of any single investment, an S&P 500 index fund will produce the highest return “on an expectancy basis,” Buffett wrote in his 2016 letter to shareholders. That’s due to its low fees (Vanguard charges just 0.03% of assets) and the inherent diversification of investing in an index fund.
While you could spend the time to construct a diversified portfolio of businesses with above-average prospects for growth, you can get a very good return just from the index fund. The S&P 500 compounded at an average rate of 9.9% from 1928 through 2023. Even when adjusting for inflation, it’s produced a real total return of around 6.5%.
The hands-off approach to investing 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 some rough estimates for how much you need to invest in order 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 compounding take care of most of the hard work of building a million-dollar portfolio. Someone nearing retirement may need to put a lot more into their investment accounts to get to 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 9.9% historical return, 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 becomes a lot more onerous as the timeline compresses. That underscores the power of compounding.
Investing earlier also protects you from the potential volatility in the market. Stock prices don’t go up in a straight line month after month. It’s not uncommon for the S&P 500 index to decline in any given month. It’ll go down in value about once every three years, and every so often it can go a whole decade without producing positive real returns for investors. But over the very long run, as Buffett points out, nothing has a better return on an expectancy basis.
On that note, readers should also be aware the above table is merely a guideline for how much you’d need to invest to achieve a million-dollar portfolio with the Vanguard S&P 500 ETF. Your actual results will differ. If you hit a good sequence of returns, you’ll end up with much more than $1 million. A poor sequence 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 performed so far.
Finally, these guidelines are not adjusted for inflation. As we’ve seen over the last few years, inflation can quickly eat away at your buying 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.
Nonetheless, the principle remains the same for Buffett. Investing in an S&P 500 index fund like the one from Vanguard is not only a simple 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 Motley Fool has a disclosure policy.
This Warren Buffett ETF Makes Becoming a Millionaire Investor as Simple as Can Be was originally published by The Motley Fool
Source: finance.yahoo.com