Warren Buffett is known for stock picking, selecting excellent long-term companies trading at reasonable or even dirt cheap prices and holding on for the long term. Using this strategy, he's helped Berkshire Hathaway's portfolio to achieve a compounded annual gain of almost 20% over the past 58 years. This is compared to the compounded annual increase of 10% for the S&P 500 index.
But Buffett also is a strong believer in another investing move that's a lot easier than stock picking -- it doesn't require research, specific knowledge of a particular company or industry, and it's proven itself to be a winner over time. In fact, Buffett owns this type of asset himself, an investment that complements his hand-picked stocks portfolio, and he's suggested that it's the ideal investment for a non-professional investor. If we use history as a guide, this asset could turn $300 per month into $1 million. Let's find out more.
Start Your Mornings Smarter! Wake up with Breakfast news in your inbox every market day. Sign Up For Free ?
Image source: The Motley Fool.
Betting on stock market leaders
So, what is this Buffett approved strategy? It's the investment in an S&P 500 Index fund, a move that allows you to bet on all of the companies currently fueling the U.S. economy. Buffett holds the SPDR S&P 500 ETF Trust(NYSEMKT: SPY) as well as the Vanguard S&P 500 ETF in his portfolio -- both make great investments, but we'll use the SPDR fund as an example here.
These funds include the same companies found in the S&P 500 at the same weighting, and as a result, they track the performance of the index. Since the goal of the index is to measure the performance of major leaders of the times, stocks included are reviewed on a quarterly basis -- during those reviews, additions and deletions are announced. For example, this year the index invited high-growth technology companies Palantir Technologies and Super Micro Computer to join.
This means when you're invested in the S&P 500 through an index fund, you're always invested in the day's most prominent players -- and in fields that are making the biggest gains. For example, technology stocks, with a weighting of 32%, are the most heavily weighted in the index and in the funds that track it. The SPDR fund's top positions include Apple, Nvidia, and Microsoft, each representing more than 6% of the fund.
At the same time, these funds offer you a great deal of diversification, with positions in 10 other industries. This allows you to benefit from top players in many areas -- without having to become an expert in these companies and fields.
Advice from Warren Buffett
The goal of a non-professional investor should be "to own a cross-section of businesses that in aggregate are bound to do well," Buffett wrote in a shareholder letter several years ago. "A low-cost S&P 500 index fund will achieve this goal." (ETFs, or exchange-traded funds, come with fees, as seen in their expense ratio. You'll want one with a ratio of less than 1%, and the SPDR fits the bill, with a ratio of 0.09%.)
Now, all of this sounds great -- but how do we get to $1 million? This is through the magic of compounding, thanks to monthly investments in the fund along with commitment to doing this over time. We'll imagine you initially invest $5,000 in the SPDR S&P 500 ETF trust, then you invest $300 monthly over 35 years.
Historically, the S&P 500 has delivered an annual average return of about 10% since its beginnings as a 500-company index in the late 1950s. If this continues to be the case, your investment would total more than $1 million by the end of the 35-year investment period. Pretty good for a strategy that doesn't involve research or a time commitment -- only a monthly financial contribution.
Now, you might say, "what if I don't have $5,000 to invest up front or $300 to invest monthly?" -- don't worry. You can use this strategy even with a much smaller financial commitment and still potentially see significant growth. An initial investment of $500, for example, and monthly contributions of $200 could result in returns of more than $600,000 over the 35-year time period.
Though Buffett clearly has proven his strength as a stock picker, he still believes in investing in the S&P 500 to further increase his chances of winning. And the great news is you don't have to be an expert investor or a billionaire to add this move to your repertoire -- and like Buffett, potentially grow wealth over the long term.
Should you invest $1,000 in SPDR S&P 500 ETF Trust right now?
Before you buy stock in SPDR S&P 500 ETF Trust, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and SPDR S&P 500 ETF Trust wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $865,595!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. TheStock Advisorservice has more than quadrupled the return of S&P 500 since 2002*.
Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Berkshire Hathaway, Microsoft, Nvidia, Palantir Technologies, and Vanguard S&P 500 ETF. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
