Warren Buffett's Favorite Index Fund: A Path to Wealth

Whether you're planning for retirement or aiming to enhance your wealth, investing in the stock market offers a straightforward and secure method to cultivate long-term prosperity.

If you're seeking a relatively safe, low-effort entry into the stock market, consider an index fund. An index fund is essentially a collection of securities packaged into a single investment, enabling you to gain exposure to hundreds of stocks with just one fund.

Among the numerous index funds available, one stands out for its impressive track record of weathering market downturns and consistently delivering positive returns. This fund is endorsed by renowned investor Warren Buffett.

By adopting the right investment strategy, this fund could help you accumulate $1 million or more.

Wealth Generation with Reduced Risk

While it's impossible to eliminate risk entirely when investing in stocks, the S&P 500 index fund is one of the safer options available.

This investment tracks the S&P 500 (^GSPC 1.09%), meaning it encompasses stocks from every company listed in the index. These companies represent some of the largest and most resilient in the United States, spanning various industries including technology, finance, and consumer goods.

Investing in a single index fund provides instant diversification, significantly mitigating your investment risk. In general, a diversified portfolio can offer more protection against market fluctuations. Although S&P 500 index funds may still experience short-term volatility, they are much more likely to recover and generate positive long-term returns.

Indeed, the S&P 500 itself boasts a perfect record for bouncing back from downturns. Analysts at Crestmont Research have studied the S&P 500's long-term performance, particularly focusing on returns over 20-year periods.

They have noted that every 20-year period in the history of this index has concluded with positive total returns. This indicates that if you had invested in an S&P 500 index fund at any moment and maintained your investment for 20 years, you would have made a profit.

A Strong Endorsement from Warren Buffett

Warren Buffett himself advocates for investing in S&P 500 index funds. Through his holding company, Berkshire Hathaway, he owns two particular funds: the Vanguard S&P 500 ETF (VOO 1.13%) and the SPDR S&P 500 ETF Trust (SPY 1.20%).

Buffett famously wagered $1 million that an S&P 500 index fund would outperform a selection of actively managed funds over a 10-year stretch starting in 2008. His investment yielded total returns of 125.8% during that period, while the five hedge funds involved reported returns between just 2.8% and 87.7%, with an average of approximately 36% across all five funds.

Buffett reflected on this outcome in a letter to Berkshire Hathaway shareholders after the bet closed, stating: "The five funds-of-funds got off to a fast start, each beating the index fund in 2008. Then the roof fell in. In every one of the nine years that followed, the funds-of-funds as a whole trailed the index fund."

He concluded this discussion with a timeless piece of advice: "A final lesson from our bet: Stick with big, 'easy' decisions and eschew activity."

This suggests that you don’t necessarily need to select the perfect stocks at the perfect time or make precisely timed market moves. Simply investing in an uncomplicated index fund and allowing it to grow over 10 or 20 years could yield substantial returns.

Creating a $1 Million Portfolio

Even with a relatively conservative investment such as S&P 500 index funds, you can realize significant profits over time.

The S&P 500 has historically generated an average annual return of around 7%. Although its performance can vary dramatically from year to year (with returns fluctuating from -19.44% to 28.88% within the last five years), a longer-term perspective shows that these ups and downs average out to approximately 7% annually over many decades.

Suppose you set a goal of reaching $1 million while earning an average annual return of 7%. Depending on your timeline, here's an estimate of how much you would need to invest each month to reach that goal:

Years to Save	Monthly Investment	Total Portfolio Value
20	$2,100	$1.033 million
25	$1,325	$1.006 million
30	$900	$1.020 million
35	$625	$1.037 million
40	$425	$1.018 million

Keep in mind that the S&P 500 could potentially yield returns exceeding its average in the future. In fact, in 13 of the past 20 years, the index has achieved returns above the historic average of 7%. Notably, five of those years recorded returns exceeding 20%.

That said, it's wise to remain cautious and keep expectations realistic. Even with a 7% average annual return, consistent contributions started early can help you amass hundreds of thousands of dollars or more. By maintaining a long-term perspective, you might be able to earn more than you initially anticipate.

investment, wealth, buffett