Whether you’re saving for retirement or simply looking to increase your net worth, investing in the stock market is one of the easiest and safest ways to build long-term wealth.
If you’re looking for a relatively safe and low-maintenance way to get involved in the stock market, you can’t go wrong with an index fund. An index fund is a group of securities bundled together into a single investment, so by investing in just one fund, you can instantly gain a stake in hundreds of stocks at once.
While there are countless index funds to choose from, there’s one fund with a long track record of surviving even the worst market crashes and experiencing positive total returns. It’s approved by billionaire investing legend Warren Buffett himself.
And with the right strategy, it might even help you earn $1 million or more.
Image source: The Motley Fool.
Generating wealth with less risk
There’s no way to avoid risk entirely when investing in the stock market, but one of the safer investment options is the S&P 500 index fund.
This type of investment tracks the S&P 500 (^GSPC 1.09%), meaning it includes stocks from every company within the index. These companies are among the largest and strongest in the U.S., ranging across a wide variety of industries — from tech to financials to consumer goods and more.
Investing in just one index fund can help you achieve instant diversification, significantly lowering your risk. In general, the more variety you have within your portfolio, the more protected you are against market volatility. While S&P 500 index funds will still face short-term ups and downs, they’re far more likely to recover and go on to see positive long-term returns.
In fact, the S&P 500 itself has a flawless track record of surviving downturns. Analysts at investment research firm Crestmont Research examined the S&P 500’s long-term performance — specifically, its total returns over 20-year periods.
They found that every single 20-year period in the index’s history has ended in positive total returns. This means that if you’d invested in an S&P 500 index fund at any point and held it for 20 years, you’d have made money.
A glowing recommendation from Warren Buffett
Buffett also highly recommends the S&P 500 index fund, and he even owns two types of funds through his conglomerate, Berkshire Hathaway: the Vanguard S&P 500 ETF (VOO 1.13%) and the SPDR S&P 500 ETF Trust (SPY 1.20%).
Buffett famously bet $1 million that an S&P 500 index fund could outperform actively managed funds over a 10-year period starting in 2008. His investment earned total returns of 125.8% in that time, while the five hedge funds earned returns ranging from just 2.8% to 87.7% — averaging around 36% between the five.
“The five funds-of-funds got off to a fast start, each beating the index fund in 2008,” Buffett wrote in a letter to Berkshire Hathaway shareholders after the bet ended. “Then the roof fell in. In every one of the nine years that followed, the funds-of-funds as a whole trailed the index fund.”
He concluded by offering a timeless piece of advice for investors: “A final lesson from our bet: Stick with big, ‘easy’ decisions and eschew activity.”
In other words, you don’t necessarily need to worry about buying just the right stocks at just the right moment or making perfectly timed market moves. Sometimes, investing in an “easy” index fund and letting it sit for 10 or 20 years could earn you far more.
Building a $1 million portfolio
Even with a relatively safe investment like the S&P 500 index fund, you could still earn a lot of money over time.
Historically, the S&P 500 itself has earned an average rate of return of around 7% per year. While its year-to-year performance fluctuates significantly (in the last five years alone it’s earned returns ranging from -19.44% to 28.88%), those annual ups and downs have averaged out to around 7% per year over several decades.
Let’s say you have a goal of reaching $1 million, and you’re earning a 7% average annual return on your investment. At that rate, here’s approximately what you’d need to invest each month to reach your goal, depending on how many years you have to save:
| Number of Years | Amount Invested per Month | Total Portfolio Value |
|---|---|---|
| 20 | $2,100 | $1.033 million |
| 25 | $1,325 | $1.006 million |
| 30 | $900 | $1.020 million |
| 35 | $625 | $1.037 million |
| 40 | $425 | $1.018 million |
Data source: Author’s calculations via investor.gov.
Keep in mind that there’s always a chance the S&P 500 could earn above-average returns going forward. In fact, in 13 of the past 20 years, the index has earned returns higher than its 7% historic average. Five of those 20 years even saw returns over 20%.
That said, it’s always wise to err on the side of caution and keep your expectations in check. Even with 7% average annual returns, it’s possible to earn hundreds of thousands of dollars or more by getting started early and investing consistently for as long as possible. With a long-term outlook, you could earn more than you might think.
