The Oracle of Omaha loves S&P 500 index funds -- especially this one.
Want some great investing advice? Just listen to Fleetwood Mac. The rock group had a huge hit with a song that featured the lyrics, "Don't stop thinking about tomorrow." The sooner you begin thinking about tomorrow (in particular, your retirement), the better off you'll be.
However, you don't have to do anything super complicated to be successful financially. Investing $250 per month in one Warren Buffett index fund could set you up for life.
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Buffett's favorite fund
Buffett's Berkshire Hathawayowns only two index funds. The conglomerate holds positions in the SPDR S&P 500 ETF Trustand the Vanguard S&P 500 ETF (VOO 1.12%).
These two index funds share a couple of things in common. First, they're both exchange-traded funds (ETFs) that can be bought and sold like stocks. Second, they each attempt to track the performance of the S&P 500, which includes shares of the 500 largest publicly traded U.S. companies.
I think we can reasonably conclude that Buffett's favorite fund of these two is the Vanguard S&P 500 ETF. Why? For one thing, Berkshire has a slightly larger stake in the Vanguard ETF than the SPDR ETF.
The main reason why I maintain that it's the legendary investor's favorite index fund, though, stems from what he has stated in the past. In 2014, Buffett wrote to Berkshire Hathaway shareholders that his will instructed that 90% of the cash his family inherits be invested in "a very low-cost S&P 500 index fund." He immediately added, "I suggest Vanguard's."
How $250 per month could help you build a fortune
Can investing $250 per month in the Vanguard S&P 500 ETF really set you up for life? I believe so -- if you start investing early enough.
The S&P 500 delivered an average annual return, including dividends, between 1957 (the index's inception in its current form) and the end of 2023 of 10.26%. As of right now, it's on track to at least reach that average this year.
Let's assume that you put your money in a tax-advantaged account such as an IRA or 401(k) plan. Let's also assume that you achieve the average return of the S&P 500, minus the Vanguard ETF's 0.03% annual expense ratio. The following table shows how much money you'd have if you invested $250 per month for different periods using this average annual return:
| Number of Years Invested | Portfolio Amount |
|---|---|
| 10 | $53,288 |
| 20 | $194,422 |
| 30 | $568,211 |
| 40 | $1,558,189 |
Table by author. All amounts are rounded to the nearest dollar.
Starting to invest at age 25 and continuing to do so through age 65 would build an investment portfolio that would indeed set up many people for life.
Two caveats
Unfortunately, there's no guarantee that the Vanguard S&P 500 ETF will deliver average annual returns of 10.26% going forward. A lower rate of return would cause your portfolio to be smaller regardless of how long you invest.
It's also important to understand that inflation can reduce the buying power of money over time. Over the long term, the inflation-adjusted average annual return of the S&P 500 has been 7.28%.
Investing $250 per month over 40 years with this return (minus the Vanguard ETF's expense fees) would enable your portfolio to grow to around $708,375. Combined with Social Security benefits, though, this amount could still set up many Americans for a comfortable retirement for the rest of their lives.
Keith Speights has positions in Berkshire Hathaway and 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.
