Here's How Warren Buffett's Favorite Index Fund Could Help Make You a Millionaire
Can the S&P 500 make you a millionaire?
During the workshops that I’ve done with many of you, I’ve been discussing the benefits of investing in the S&P 500. In case you need one more reason why this is a good idea, I’m going to use the S&P past returns to show you how important time and consistently investing is in helping you achieve your financial goals.
What Is the S&P 500?
Like me, legendary investor Warren Buffett is a big fan of the S&P 500. In his 2013 letter to Berkshire Hathaway shareholders, Buffett recommended that most investors put their money in a low-cost S&P 500 index fund. He even noted that his will instructs that 90% of the cash inherited by his family be invested in such a fund.
These funds invest in the 500 large-cap companies that make up the S&P 500, a broad cross section of businesses. Those companies represent 11 different sectors and 24 industries.
Millionaire Maker?
But can investing in the S&P 500 really make you a millionaire? Based on history, if you have a long term horizon, invest consistently, and don’t try to time the market, yes it can.
If we only looked at the last 10 years, the average total return of the S&P 500 was a little over 12.5%. Note that this percentage includes reinvesting dividends. However, that period featured an exceptionally long bull market which we may not see again. Over the last 50 years, the average annual total return of the S&P 500 was close to 10.7%.
The total return is only one component of the equation, though. How much you invest, how regularly you invest, and how much time you allow your investments to grow are also very important. The table below, from The Motley Fool, shows what it would take to make $1 million using the historical average total return of 10.7%.
If you do the math, you see that the longer you invest, the more the majority of the fund is made up of compound growth. For example, if you’d invested $1,867 each year for 40 years, you’d have invested $74,680 of your own money ($1,867 x 40). The fund would have generated $925,320 of compound growth! This is why a Roth account is such a great investment if you have the option in your 401(k) or 403(b). If this was a Roth account, $925,320 would be tax free!
Of course, there's no guarantee that the S&P 500 will generate the same level of returns going forward as it has in the past. However, even if the returns decline somewhat, making $1 million by investing in S&P 500 is a realistic goal for many individuals with a long term horizon.
NOT FINANCIAL ADVICE
The information contained in this article is for informational purposes only and shall not be understood or construed as financial advice. I am not an attorney, accountant, or financial advisor, nor am I holding myself out to be. I do not accept any fees or commissions from anyone or any financial institution.
I’d love any feedback on these articles.
