Transforming a monthly income of $450 into an astronomical sum of $976,700 through Warren Buffett's Index Fund.
Warren Buffet, renowned for his investing success and Wall Street respect, has led Berkshire Hathaway's Class A shares to deliver an impressive 19% annual return since the mid-60s. Meanwhile, the S&P 500, with a compounded yearly growth of approximately 11%, including dividends, has performed well over the long term.
Despite many investors keeping tabs on Buffet's stock transactions, they often overlook one of his wise suggestions. In 2021's Berkshire meeting, Buffet advised, "In my opinion, the best investment for most individuals is an S&P 500 index fund." He's repeatedly expressed this sentiment and suggested the Vanguard S&P 500 ETF as a specific choice (VOO 0.72%).
By investing $450 monthly in this fund, you can potentially amass $976,700 over three decades.
The Vanguard S&P 500 ETF provides substantial exposure to businesses like Apple, Microsoft, and Nvidia. This ETF follows the performance of 500 substantial U.S. companies, including value and growth stocks across all stock market sectors. It covers about 80% of domestic stocks and 50% of global stocks based on market value. Top 10 positions in the index fund are listed below, according to their weight:
- Apple: 7.3%
- Microsoft: 6.6%
- Nvidia: 6.1%
- Alphabet: 3.6%
- Amazon: 3.6%
- Meta Platforms: 2.6%
- Berkshire Hathaway: 1.7%
- Broadcom: 1.6%
- Tesla: 1.5%
- Eli Lilly: 1.4%
Buffet's belief in an S&P 500 index fund as a top investment choice for most individuals doesn't mean dismissing individual stocks entirely, but rather allocating a significant portion of your portfolio to the S&P 500 index fund. There are three main reasons why this strategy is logical.
First, professional fund managers generally find it challenging to outperform the S&P 500. In fact, only a small fraction of large-cap funds succeeded in outperforming the index over the last decade. Buffet noted this trend in his 2014 shareholder letter.
Second, the S&P 500 has consistently demonstrated superior returns compared to various other asset classes. The index had an annual return of 13% over the past decade, surpassing the average return generated by fixed income, international stocks, real estate, and precious metals, based on Morgan Stanley's data.
Third, the S&P 500 has consistently rewarded patient investors with wealth creation. In fact, over any 16-year period since its inception in 1957, the index has resulted in profits for investors holding an S&P 500 index fund for at least 16 years. According to Bespoke Investment Group, this means investors have a high probability of earning returns on their S&P 500 index fund investments.
Potential earnings with the Vanguard S&P 500 ETF
The S&P 500 provided a 2,150% return over the past three decades, translating to an annual return of 10.9%. I will assume a more conservative 10.5% annual return for demonstration purposes, offering a safety margin. This implies $500 invested monthly in the Vanguard S&P 500 ETF would generate the following returns after various holding periods:
- 10 years: $88,100
- 20 years: $327,400
- 30 years: $976,700
The expense ratio is another significant factor. The Vanguard S&P 500 ETF maintains a low expense ratio of just 0.03%, implying investors would pay only $0.30 annually for every $1,000 invested in the fund. This is significantly lower than the average expense ratio of 0.36% for U.S. index funds in 2023, as reported by Morningstar.
In conclusion, Buffet's endorsement of an S&P 500 index fund is well-founded. It provides exposure to influential companies worldwide, and index funds that follow the index, such as the Vanguard S&P 500 ETF, have proven reliable for generating returns for patient investors in the stock market.
In aligning with Buffet's advice, investing $450 monthly in the Vanguard S&P 500 ETF could potentially yield $976,700 over three decades, given a conservative 10.5% annual return.
Furthermore, Buffet's preference for an S&P 500 index fund as a top investment choice for most individuals is grounded in the challenge professional fund managers often face in outperforming the index over the long term, as well as the S&P 500's consistent superior returns compared to various other asset classes.
