In This Article:
Key Points
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The Oracle of Omaha suggests most investors put money in a low-cost fund that tracks the performance of the S&P 500.
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Investing even relatively small sums of capital on a monthly basis can result in huge wealth over the long term.
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The best investment strategy is one that people can stick to in both good and bad times.
Warren Buffett just announced that at the end of this year, he'll step down as CEO of Berkshire Hathaway after an illustrious career heading the conglomerate. He has compounded capital at 5,500,000% in the past six decades, making him an investing legend.
The Oracle of Omaha might have one of the best track records. However, his advice for the average investor is remarkably simple. Buffett suggests buying a low-cost S&P 500 index fund, such as the Vanguard S&P 500 ETF (NYSEMKT: VOO). The simplicity of such a strategy might sound boring.
But when you understand that a $1,000 monthly investment in this ETF can turn into $228,000 in just 10 years, you'll quickly realize just how powerful Buffett's suggestion can be. Here's what investors need to know about this effective money-making strategy.
Generating huge wealth
In the past decade, the Vanguard S&P 500 ETF has produced a total return of 219%. On an annualized basis, this translates to a yearly gain of 12.3%. Over the very long term, the S&P 500 has generated a roughly 10% annual return, so the last 10 years has been better, probably driven by near-zero interest rates, the rising popularity of passive investing, and solid economic growth.
It's worth pointing out that past results are no guarantee of future returns. But let's just assume that the Vanguard S&P 500 ETF registers the same gains over the next decade, which obviously is impossible to predict. If you invest $1,000 each month into this investment vehicle, then after 10 years (equating to a total of 120 investments), you'd be staring at a $228,000 balance in your portfolio. That's a phenomenal outcome.
That's the magic of dollar-cost averaging. It eliminates the need to try to correctly time the market and buy at one time. Instead, investors allocate money to the Vanguard S&P 500 ETF on a monthly basis. This allows investors to take advantage of multiple price points while building a valuable habit of consistent investing.
A low-maintenance strategy
Everyone wants to be a successful stock picker like Warren Buffett. The truth, however, is that we not only don't possesss expert financial modeling and business analysis skills, but we lack probably don't have enough time to do this. Here's where buying the Vanguard S&P 500 ETF truly shines as a low-maintenance strategy.