The stock market can be intimidating at times, especially during periods of economic uncertainty. With concerns that a recession may be on the horizon, it can be a particularly daunting time to invest.
However, the right investments can keep your money safer, regardless of what the future holds. While there isn’t necessarily a right or wrong way to invest, there’s one exchange-traded fund (ETF) Warren Buffett highly recommends, and it could take you from $5,000 to more than $87,000 while barely lifting a finger.
A safe (yet powerful) investment
One of Warren Buffett’s most highly recommended investments is the S&P 500 ETF. In fact, it’s the only ETF in his Berkshire Hathaway portfolio, which invests in both the Vanguard S&P 500 ETF (NYSEMKT: VOO) and SPDR S&P 500 ETF Trust (NYSEMKT: SPY).
Buffett has long encouraged investors to opt for an S&P 500 ETF, and he famously put his money where his mouth was in 2008 when he bet that this type of investment would outperform a group of hedge funds.
He won that bet by a landslide, with the S&P 500 fund earning total returns of more than 125% over 10 years. Meanwhile, the five hedge funds’ total returns averaged out to only around 36% in that timeframe.
Not only is the S&P 500 a powerful investment, it’s also one of the safest options out there. This fund contains stocks from 500 of the largest and strongest companies in the U.S., with the largest holdings including household names like Apple, Amazon, and Microsoft.
This type of fund is also well-diversified, which limits your risk. Because there are hundreds of stocks across a wide variety of industries, this ETF is more protected against market downturns. Even if we do face a recession or more severe bear market, the S&P 500 is almost guaranteed to recover.
Building wealth with the S&P 500 ETF
Perhaps one of the best advantages of this investment, though, is that it’s incredibly low maintenance. With just one fund, you’ll own a stake in hundreds of different stocks. That means you never need to worry about researching companies or deciding when to buy or sell.
All you have to do, then, is invest consistently and give your money time to grow. Over time, even a relatively small amount of money can grow into tens or even hundreds of thousands of dollars.
For example, say you invested $5,000 in an S&P 500 ETF today. Historically, the index itself has earned an average rate of return of around 10% per year. At that rate, you’d accumulate just over $87,000 after around 30 years — assuming you just let your money sit and made zero additional contributions.
To really supercharge your savings, though, you can invest a small amount each month in addition to your initial contribution. Say, for instance, you were to invest $5,000 now plus $200 per month. Assuming you’re still earning a 10% average annual return, here’s approximately how much you’d accumulate over time:
| Number of Years | Total Savings |
|---|---|
| 20 | $171,000 |
| 25 | $290,000 |
| 30 | $482,000 |
| 35 | $791,000 |
| 40 | $1,289,000 |
Data source: Author’s calculations via Investor.gov
For many investors, the S&P 500 ETF is the best of all worlds. It requires minimal effort on your part, it carries less risk than many other investments, and it can potentially help you reach millionaire status over time.
The best way to take advantage of an S&P 500 ETF is to start investing now. Even if you can’t afford to contribute much each month, a little can go a long way. And the sooner you get started, the less you’ll need to invest monthly to accumulate hundreds of thousands of dollars or more.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Katie Brockman has positions in Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Amazon.com, Apple, Berkshire Hathaway, Microsoft, and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
