The right investments can supercharge your portfolio, helping you maximize your earnings while minimizing risk. It can be tricky, though, to invest in the right places, especially when everyone's preferences and needs will be slightly different.
While there's no single correct way to invest, there is one exchange-traded fund (ETF) that could be a good fit for many people. It's not only one of the safest ETFs out there and almost guaranteed to make you money over time, but it's also earned the Warren Buffett stamp of approval.
An effortless way to build wealth
Most of Warren Buffett's portfolio through his holding company Berkshire Hathaway is comprised of individual stocks. He does own two ETFs, though, both of which are S&P 500 ETFs: the Vanguard S&P 500 ETF (VOO -0.01%) and the SPDR S&P 500 ETF Trust (SPY -0.02%).
An S&P 500 ETF tracks the itself. Each fund includes stocks from 500 of the largest and strongest companies in the U.S. across a wide variety of industries. When you invest in a single ETF, then, you're actually investing in hundreds of different stocks at once.
While this ETF won't be right for everyone, it can be a good fit for those looking for a low-maintenance investment that can consistently grow your savings over time with less risk. A few of the S&P 500 ETF's biggest advantages include:
- Very little upkeep: Because all of the stocks in this ETF are already chosen for you, that can save you loads of time. You don't need to research companies, keep up with industry trends, or decide when to buy or sell a stock. Simply invest whatever you can afford, and the ETF will do all the heavy lifting for you.
- Immediate diversification: Each S&P 500 ETF contains roughly 500 stocks from many different sectors, which can substantially lower your risk. Even if a few stocks (or even an entire industry) take a hit, it won't sink your entire portfolio.
- A long track record of positive returns: The S&P 500 itself has a decades-long history of earning positive returns. Since 2000, the index has earned total returns of more than 221% -- despite experiencing some of the worst recessions and market crashes in history during that time. While there are never any guarantees when investing, an S&P 500 ETF is one of the most reliable ETFs out there.
Buffett himself also famously put his money where his mouth was by betting $1 million that an S&P 500 fund could outperform a group of actively managed hedge funds. His investment earned a whopping 126% return over 10 years, while the five hedge funds averaged returns of just 36% in that time.
How much could you earn over time?
Time is your most valuable resource when investing, and the S&P 500 ETF is an exceptional long-term investment. Like all investments, it can be susceptible to short-term downturns. But over decades, it's extremely likely to see positive total returns.
Historically, the market itself has earned an average rate of return of around 10% per year -- meaning the highs and lows have averaged out to around 10% annually over several decades. If you were to invest, say, $200 per month in an S&P 500 ETF earning a 10% average annual return, here's approximately how much you could accumulate over time:
| Number of Years | Total Portfolio Value |
|---|---|
| 20 | $137,000 |
| 25 | $236,000 |
| 30 | $395,000 |
| 35 | $650,000 |
| 40 | $1,062,000 |
Data source: Author's calculations via investor.gov.
The more time you have to let your money grow, the more you can potentially earn. Even if you can't afford to invest hundreds of dollars per month, getting started now can help maximize your earning potential over time.
Despite all its advantages, the S&P 500 ETF has one big downside: it can't beat the market. Because it's designed to follow the market, it's impossible for it to earn above-average returns. If that's a priority for you, investing in individual stocks may be a better option.
The S&P 500 ETF may not be perfect, but it's a powerhouse investment that can still keep your money safer -- all with next to no effort on your part. If you're looking for a low-maintenance investment to grow your savings over time, this ETF could be a great fit for you.
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.
