Warren Buffett Says Buy an S&P 500 Index Fund. Here's What $500 a Month Is Worth in 20 Years at 3 Different Return Rates.
The Oracle of Omaha doesn't think most investors should pick individual stocks.
Warren Buffett, the renowned investor, advises that the best way to build wealth is by investing in an S&P 500 index fund, like the Vanguard S&P 500 ETF. He suggests this over picking individual stocks. This advice is backed by a comparison of three potential outcomes over a 20-year period with a monthly investment of $500.
In the first scenario, if the market's return is significantly below its long-term average, investors would see a smaller return. The S&P 500 has averaged around 10% annualized total return historically. Investing at a 5% rate would result in $205,000 over 20 years, which might not seem appealing when compared to the security of a 10-year U.S. Treasury note offering a 5% risk-free yield.
The second scenario assumes the S&P 500 matches its historical performance. This is likely, given the economy's growth and the Federal Reserve's focus on controlling inflation. With a 10% annualized return, $500 invested monthly would grow to $364,000 over 20 years. This is seen as the most probable outcome, as it assumes the market returns to the mean.
The third and most optimistic scenario expects the S&P 500 to continue its above-average growth. This scenario disregards valuation concerns and assumes that unsustainable growth can continue. With a 15% annualized return, $500 invested monthly could accumulate to $669,000 over 20 years. Despite the valuation being historically high, this scenario presents a compelling case for the long-term potential of the S&P 500 index fund.
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