Investing in the stock market can be lucrative, and with the right strategy, you could generate life-changing wealth. Not all investments are created equal, though, and even good stocks won't be the right fit for every portfolio.
Exchange-traded funds (ETFs) can be a fantastic option if you're looking for a low-cost, low-maintenance investment that requires very little upkeep. An ETF is a basket of securities bundled together into a single investment, so by investing in just one fund, you'll instantly own a stake in dozens or hundreds of stocks.
While there are countless ETFs to choose from, there's one that comes highly recommended by Warren Buffett. Your earnings will depend on how much you can afford to invest and how long you have to let your money grow, but it's possible to go from $0 to $1 million or more while barely lifting a finger.
A safe and reliable investment
The right ETF can supercharge your savings, and one of the safest and most reliable options is an S&P 500 ETF. This fund tracks the S&P 500 index, meaning it includes the same stocks that are in the index and aims to mirror its long-term performance.
The S&P 500 includes stocks from 500 of the strongest companies in the U.S. across a wide variety of industries, and by investing in this ETF, you'll instantly own a stake in all 500 of those businesses. This can help easily create a diversified portfolio, limiting your risk with much less effort than investing in individual stocks.
Warren Buffett has long recommended the S&P 500 index fund and ETF, and through his holding company Berkshire Hathaway, he also owns two of these types of investments: the Vanguard S&P 500 ETF (NYSEMKT: VOO) and the SPDR S&P 500 ETF Trust (NYSEMKT: SPY).
Back in 2008, he also famously bet $1 million that an S&P 500 index fund could outperform a group of actively managed hedge funds. Over 10 years, his investment earned total returns of nearly 126%, while the five hedge funds averaged returns of just 36%.
While no investment is immune to volatility, the S&P 500 itself has a perfect track record of recovering from downturns. Throughout its history, it's seen severe bear markets, recessions, and crashes -- and survived every single one. While there are no guarantees when it comes to the stock market, an S&P 500 ETF is about as close as you can get to guaranteed positive returns over time.
Finally, this type of investment requires next to no effort on your part. All the stocks within the fund are already chosen for you, so there's minimal research involved. By simply investing consistently and keeping a long-term outlook, you could generate a substantial amount of wealth with little effort.
Building a $1 million portfolio
The S&P 500 ETF is known for its relative safety, but it's also a powerhouse investment -- especially if you give it plenty of time to grow.
Historically, the market itself has earned an average rate of return of around 10% per year. This means that while you likely won't earn 10% returns each and every year, the annual highs and lows should average out to roughly 10% per year over decades.
Say you're just starting out in the stock market and are earning a 10% average annual return with an S&P 500 ETF. Here's approximately what you'd need to invest each month to reach $1 million in total savings, depending on how many years you have to let your money grow:
Number of Years | Amount Invested Per Month | Total Portfolio Value |
|---|---|---|
20 | $1,500 | $1.031 million |
25 | $850 | $1.003 million |
30 | $525 | $1.036 million |
35 | $325 | $1.057 million |
40 | $200 | $1.062 million |
Data source: Author's calculations via investor.gov.
The more time you have to save, the less you'll need to invest each month to reach $1 million or more. Regardless of how much you can afford to invest, it's wise to get started sooner rather than later.
One downside to consider before buying this type of investment, however, is that S&P 500 ETFs can't earn above-average returns. They're designed to follow the performance of the market, so it's impossible for them to beat the market. If earning higher-than-average returns is a primary goal of yours, investing in individual stocks may be a better option.
Investing in the stock market is a highly personal experience, so there's no one-size-fits-all investment for every portfolio. But if you're looking for a low-maintenance investment that could help you earn hundreds of thousands of dollars (or even $1 million or more) over time, an S&P 500 ETF may be a great choice.
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Katie Brockman has positions in Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Berkshire Hathaway and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
1 Warren Buffett ETF That Could Take You From $0 to $1 Million (While Barely Lifting a Finger) was originally published by The Motley Fool
