Warren Buffett has always strongly believed in two things: the strength of American companies and the benefits of long-term investing. And if you put these elements together, you can construct an investing strategy that’s likely to score a win. But first, let’s consider why we should listen to the billionaire.
At the helm of Berkshire Hathaway, Buffett has proven his investing excellence for 59 years. During that time, he’s helped generate a compounded annual gain of almost 20%, surpassing the 10% compounded increase of the S&P 500 index. Throughout that time, Buffett encountered a range of market environments, from times of exuberance to recessions and market crashes. Yet, he’s scored a major long-term win, and that’s why it’s a great idea to consider his investing advice.
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So, how can you use those two Buffett beliefs I mentioned above to reach your own investing victory? Part of the plan involves buying shares of a Buffett-approved Vanguard fund, and the other part involves a steady, long-term commitment to it. Let’s check out how you could potentially turn $300 per month into $1 million.
First, let’s consider exactly why Buffett is so confident about American companies. It has to do with their long-standing track record of success. In Buffett’s letter to shareholders back in 2013, he wrote, “American business has done wonderfully over time and will continue to do so.”
And his optimism has not wavered, with Buffett writing the following in his 2023 shareholder letter: “I can’t remember a period since March 11, 1942 — the date of my first stock purchase — that I have not had a majority of my net worth in equities, U.S.-based equities. And so far, so good.” He went on to write: “America has been a terrific country for investors.”
To benefit from the best the U.S. has to offer, you could and should individually pick stocks. But to complement this effort and pretty much ensure gains over time, it’s a great idea to buy an asset that offers exposure to a wide variety of the very best American companies. And this instrument is a fund that tracks the S&P 500. Buffett has mentioned the Vanguard S&P 500 ETF (NYSEMKT: VOO) in his shareholder letters and has even invested in this fund himself.
In fact, Buffett says that funds tracking the S&P 500 are an ideal choice for the nonprofessional investor, thanks to their inclusion of so many top companies. ETFs, or exchange-traded funds, mimic the composition of their index of reference and, therefore, its performance. In this case, that would be the S&P 500, which, as mentioned, has delivered a double-digit annualized gain over time.
It’s also important to note that after every market downturn or crash, the index has gone on to recover and advance over time. So, history shows us that we can pretty much count on positive performance from the index over a period of years.
All of this means that investing in the Vanguard S&P 500 ETF sounds like a great way to benefit from the strength of American companies. Now, let’s see how we can maximize our gains. And that’s by relying on the magic of compounding. We can do this by making an initial investment in the fund and then investing a set amount of our choosing on a monthly basis over a number of years.
Let’s look at an example, using an average annual return of 10%. If you initially invest $1,000 in the Vanguard S&P 500 ETF and then invest $300 per month over a period of 35 years, your investment could reach $1 million. Of course, this is an ideal situation — performance could vary, resulting in returns that are somewhat higher or lower than this figure.
However, in general, if you commit to investing regularly in this ETF over the long term, you’ll likely generate a significant win. This could be done with much less than the $1,000/$300 combination I used in my example. This strategy can be adapted to any budget, as long as you keep it going over many years.
Now, the best news of all is that you can start this strategy at any moment, during any market environment — but it’s particularly interesting to get going at a time when prices are down, such as now. Since your focus is on the long-term, you won’t have to worry about short-term disturbances. So, this Warren Buffett-approved Vanguard fund, combined with a commitment to monthly investment, could set your mind at ease in the near term and potentially pave the way to $1 million over the long haul.
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Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
This Warren Buffett-Approved Vanguard Fund Could Turn $300 Per Month Into $1 Million was originally published by The Motley Fool