Warren Buffett over the years has guided Berkshire Hathaway to enormous success. It was a doomed textile operation in 1965, but has since evolved into a trillion-dollar company under his leadership. Consequently, Buffett has become a trusted source of inspiration for countless investors.
Buffett reminded attendees at Berkshire's annual meeting in 2020, "In my view, for most people, the best thing to do is to own the S&P 500 (^GSPC 1.81%) index fund." He has frequently repeated that advice, and has even suggested the Vanguard S&P 500 ETF (VOO 1.81%).
Here's how that advice could turn $450 invested monthly into $888,200 over 30 years.
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Key Data Points
The Vanguard S&P 500 ETF provides exposure to influential stocks like Apple, Nvidia, and Microsoft
The S&P 500 is considered the single best benchmark for the U.S. stock market. It tracks the performance of 500 large companies that span every stock market sector, covering about 80% of domestic equities and 50% of global equities by market value. In short, the S&P 500 includes many of the most influential companies in the world.
Investors cannot directly purchase shares of a stock market index like the S&P 500. But the Vanguard S&P 500 ETF circumvents that problem. It is an investment product that lets investors spread money across the index's member stocks.
Here are the 10 largest positions in the Vanguard S&P 500 ETF, listed by weight:
- Apple: 7.2%
- Nvidia: 6.1%
- Microsoft: 5.9%
- Amazon: 3.9%
- Alphabet: 3.6%
- Meta Platforms: 2.9%
- Berkshire Hathaway: 1.9%
- Broadcom: 1.8%
- Tesla: 1.6%
- JPMorgan Chase: 1.5%
As mentioned, Warren Buffett has long regarded a low-cost S&P 500 index fund as the best way for most nonprofessional investors to get exposure to the U.S. stock market. "I don't think most people are in a position to pick single stocks," he told attendees at Berkshire's annual meeting in 2020.
That's because most people lack the commitment and temperament required to identify quality stocks on a company by company basis. "The goal of the nonprofessional should not be to pick winners," Buffett wrote in his 2013 shareholder letter. Instead, he said they should "own a cross-section of businesses that in aggregate are bound to do well. An S&P 500 index fund will achieve this goal."
How the Vanguard S&P 500 ETF could turn $450 per month into $888,200
The S&P 500 advanced 1,670% in the last three decades, compounding at 10% annually, even though the U.S. economy was hit by three recessions. That period encompasses such a broad range of economic conditions that investors can be reasonably confident in similar returns over the next three decades.
At that pace, $450 invested monthly in the Vanguard S&P 500 ETF would be worth $86,000 after one decade, $309,200 after two decades, and $888,200 after three decades. Importantly, those numbers assume dividends are consistently reinvested and that no money is withdrawn.
The last item of consequence is the expense ratio. The Vanguard S&P 500 ETF has a cheap expense ratio of 0.03%, meaning shareholders will pay only $3 annually on every $10,000 invested in the fund. Investors will be hard-pressed to find another index fund that offers similar upside at a lower price. Indeed, the S&P 500 has outperformed most other asset classes over the last few decades, including international stocks, fixed income, real estate, and precious metals.
Importantly, while Buffett believes most people should avoid individual stocks and instead stick with an S&P 500 index fund, investors willing to do the required research can combine the two approaches. For instance, I keep a large percentage of my portfolio in the Vanguard S&P 500, and the rest is allocated to individual stocks. That strategy leaves room for me to beat the market if my stocks outperform, but also limits how much I could trail the market if my stocks underperform.
