This investment advice from Warren Buffett could make you a stock market millionaire

For some investors, the phrase “stock market millionaire” conjures up glamorous images of fast-paced, adrenaline-fueled trading. But the truth is usually more mundane. In most cases, stock market wealth stems from boring decisions made regularly over long periods of time.

Warren Buffett has often recommended a low-cost S&P500 index fund as the most sensible option for the vast majority of investors, noting that “by periodically investing in an index fund, the clueless investor can actually outperform most investment professionals”.

To prove his point, Buffett once bet $500,000 that a passively managed S&P 500 index fund could outperform a group of actively managed hedge funds over a 10-year period. Protégé Partners accepted this challenge. The company selected five hedge funds and commissioned more than 200 fund managers to select stocks.

The betting began during the financial crisis of 2008, a tumultuous period that ultimately saw the S&P 500 lose more than half of its value. But Buffett emerged victorious, and he won by a wide margin. Its S&P 500 index fund had returned 126% (net of fees), while Protégé Partners’ top performing fund was up only 88%.

In a nutshell, Buffett beat a team of highly trained professionals without doing any work. Any investor can achieve the same success by imitating their strategy.

How to Build a Million Dollar (or More) Portfolio

Buffett currently owns two S&P 500 index funds through Berkshire Hathawayinvestment portfolio of: Le SPDR S&P 500 ETF (TO SPY -0.83%) and the Vanguard S&P 500 ETF (VOO -0.83%). The first is managed by State Street Global Advisors, and it supports an expense ratio of 0.0945%. The latter is managed by The Vanguard Group, and it bears an expense ratio of 0.03%.

Other than these differences, index funds are essentially the same. Both offer exposure to 500 of the largest US companies, representing a diverse mix of value stocks and growth stocks that span all 11 equity sectors. This means that either ETF is a great option for investors looking to build a million dollar portfolio.

The most important variable is your holding period. The S&P 500 has produced a total return of 1,520% over the past three decades, the same as 9.73% per year. At this rate, $150 invested in an S&P 500 index fund on a weekly basis would be worth just over $1 million after 28 years.

This graph shows how three different weekly contribution amounts would increase over four different holding periods. All scenarios assume an annualized return of 9.73%.

Holding period

$50 per week

$100 per week

$200 per week

25 years

$257,536

$515,073

$1 million

30 years

$426,258

$852,518

$1.7 million

35 years

$694,668

$1.4 million

$2.8 million

40 years

$1.1 million

$2.2 million

$4.5 million

Data source: Graph by author.

This chart also showcases the power of compounding. It may take three or four decades to earn your first million dollars, but the second million comes faster and the third million comes even faster.

Is it the right time to invest in the stock market?

The answer is still Yes. No one knows the future, but regularly investing small amounts of money in an S&P 500 index fund helps correct the natural ups and downs of the stock market. This principle is known as average purchase price. That said, now is a particularly good time to invest

Warren Buffett offered the following advice in his 2013 letter to shareholders: “A climate of fear is your friend when investing; a euphoric world is your enemy.”

The financial world is currently mired in fear. Inflation is near a four-decade high, interest rates are rising at their fastest pace since the early 1980s, and both forces threaten to tip the US economy into recession. This worry sent the S&P 500 into a bear market, and bear markets have always been a great time to invest.

Trevor Jennewine has positions in Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Berkshire Hathaway (B shares) and Vanguard S&P 500 ETF. The Motley Fool recommends the following options: $200 long calls in January 2023 on Berkshire Hathaway (B shares), $200 short puts in January 2023 on Berkshire Hathaway (B shares) and short calls of $265 in January 2023 on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

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