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Warren Buffett is known for his ability to pick great stocks and make winning investments over time.as chairman berkshire hathawayhe helped achieve nearly 20% annual compounded returns over 57 years. S&P500‘s (SNPINDEX: ^GSPC) Approximately 10% compound increase. So if you want to follow in the footsteps of millionaire investors, you may think that perfecting your stock-picking skills is your only option.
But there’s actually another, easier option that Buffett supports. The Oracle of Omaha himself followed this advice. I’m talking about investing in funds that track the S&P 500 index. Berkshire Hathaway owns two of them. SPDR S&P 500 ETF Trust (spy 0.07%) And that Vanguard S&P 500 ETF (VOO 0.05%). According to Buffett, investing regularly in one of these funds over a long period of time can significantly build your wealth. Let’s take a closer look at this top investor’s advice and how to apply it.
Buffett’s advice
Buffett has generated most of his wealth by picking individual stocks, which he admits is often difficult. In a 2013 letter to Berkshire Hathaway’s shareholders, Buffett proposed a way around the problem.
He says, “The goal of a non-expert should not be to pick winners, but rather to own a variety of businesses that should be successful as a whole. Low-cost S&P 500 index funds help achieve this goal. Achieve.”
Because the S&P 500 Index Fund includes members of that benchmark, it tracks the performance of the index year after year. As Buffett says, these funds are home to a wide variety of companies. And as you can see from the composition of the index and the specific fund, we’ll use his SPDR fund here. Investing in these products gives you exposure to some of the world’s top companies.
The top five holdings of the SPDR S&P 500 ETF, which mirrors the S&P 500 Index, are:
| company | Index/fund weight |
|---|---|
| microsoft | 7.08% |
| apple | 6.78% |
| Amazon | 3.48% |
| Nvidia | 3.34% |
| alphabet | 2.10% |
love technology
This clearly favors technology, which accounts for more than 28% of the fund and the S&P 500 index. This is not surprising since the index reflects what is driving the economy at the time. Indexes and funds that track indexes are key to growth.
But it’s no exaggeration to say that S&P funds offer broad exposure to all types of companies, with double-digit weightings in healthcare, financials, and consumer discretionary stocks. Finally, several other industries make up the remainder of the fund and index, including industrials and energy.
So by buying an index fund, you’re investing in a wide range of stocks, and as history has shown, you’re more likely to win in the long run. For the past 50 years, the stock market’s average annual return has been 10%.
magic of synthesis
So let’s run this. All this means that if he invested $200 a month in the SPDR S&P 500 ETF over the next 15 years, his investment could reach $76,254. That’s thanks to compound interest, the idea that profits generate more profits over time.
Over the period, you donated $36,000 and generated more than $40,000 in revenue. And the only thing you had to do was make a monthly donation. Of course, you can increase or decrease this contribution depending on your budget. Even a small investment can yield excellent returns in the long run.
Note that this is just a model and assumes a long-term annual return of 10%. No one can predict what the stock market will do, but it is known to surprise us. But it’s natural to be optimistic about long-term investing, as the overall market has consistently proven to consistently beat out bear markets and continue to make progress over time.
^SPX data by YCharts
That’s why it’s a great idea to invest in a fund that tracks this performance.
Finally, another important piece of advice from Warren Buffett: Always invest in cheap index funds. With a P/E ratio of approximately 21, the SPDR S&P 500 ETF fits that criteria.
So whether you’re a regular stock picker or a novice investor, committing to a monthly contribution to an index fund can be a great way to start 2024 and pave the way to wealth. There is a possibility.
John Mackey, former CEO of Amazon subsidiary Whole Foods Market, is a member of the Motley Fool’s board of directors. Alphabet executive Suzanne Frye is a member of The Motley Fool’s board of directors. Adria Cimino has a position at her Amazon. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Berkshire Hathaway, Microsoft, Nvidia, and Vanguard S&P 500 ETFs. The Motley Fool has a disclosure policy.
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