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Want great investment advice? Listen to Fleetwood Mac. The rock group had a huge hit with a song featuring the lyric “Don’t stop thinking about tomorrow.” The sooner you start thinking about tomorrow (especially retirement), the better off you’ll be.
However, you don’t have to do anything super complicated to be financially successful. Investing $250 a month in a Warren Buffett index fund could last you a lifetime.
Image source: Getty Images.
Buffett’s favorite funds
Mr. Buffett’s berkshire hathaway I only own two index funds. This conglomerate is SPDR S&P 500 ETF Trust And that Vanguard S&P 500 ETF (VOO 0.96%).
These two index funds have several things in common. First, both are exchange-traded funds (ETFs) that can be bought and sold like stocks. Second, they try to track their respective performance. S&P500which includes stocks in 500 of the largest publicly traded companies in the United States.
I think we can reasonably conclude that Buffett’s favorite of these two funds is the Vanguard S&P 500 ETF. why? First, Berkshire has a slightly higher stake in the Vanguard ETF than in the SPDR ETF.
But the main reason I claim this is the legendary investor’s favorite index fund stems from what he has said in the past. In 2014, Buffett wrote to Berkshire Hathaway shareholders that his will directed his family to invest 90% of the cash they inherited in a “very low-cost S&P 500 index fund.” Ta. He quickly added, “I recommend Vanguard’s.”
How $250 per month can help you build wealth
Can you really invest $250 a month in the Vanguard S&P 500 ETF for the rest of your life? I believe so, if you start investing early enough.
The S&P 500 had an average annual return, including dividends, of 10.26% from 1957 (the inception of the index in its current form) to the end of 2023. Right now, we’re on track to at least hit that average this year.
Let’s assume you put your money in a tax-advantaged account, such as an IRA or 401(k) plan. Let’s also assume that you achieved the average return of the S&P 500 minus the Vanguard ETF’s annual expense ratio of 0.03%. The following table uses this average annual return to show how much money you would make if you invested $250 per month for various time periods.
| Investment years | Portfolio amount |
|---|---|
| Ten | $53,288 |
| 20 | $194,422 |
| 30 | $568,211 |
| 40 | $1,558,189 |
Table by author. All amounts are rounded to the nearest dollar.
By starting to invest at age 25 and continuing to invest until age 65, you can actually build an investment portfolio that will last most people’s lives.
Two things to keep in mind
Unfortunately, there is no guarantee that the Vanguard S&P 500 ETF will continue to deliver an average annual return of 10.26%. A lower rate of return results in a smaller portfolio, regardless of the investment period.
It’s also important to understand that inflation can reduce the purchasing power of your money over time. Over the long term, the S&P 500 has an inflation-adjusted average annual return of 7.28%.
If you invested $250 per month over 40 years with this return (minus Vanguard ETF fees), your portfolio could grow to approximately $708,375. However, when combined with Social Security benefits, this amount will allow many Americans to retire comfortably for the rest of their lives.
Keith Speights has positions in Berkshire Hathaway and the Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Berkshire Hathaway and Vanguard S&P 500 ETFs. The Motley Fool has a disclosure policy.
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