This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
Investing can make you rich if you do it right. Perhaps the best example of this is Warren Buffett who has become a billionaire largely through a series of sound investments.
The good news is, anyone can follow Buffett's advice and have a very good chance of building substantial wealth for themselves over time. In particular, there's one solid investment that carries very low risk that Buffett recommends and that's all but certain to leave you with a seven-figure nest egg if you invest enough money in it.
Here's what it is.
This Warren Buffett recommendation can pay off for you
Although Buffett has made his fortune by selecting individual stocks (and companies) to invest in, his recommendation for most investors is not to follow in his footsteps. Instead, he suggests the majority of people are better off putting most of their money into one single investment: an S&P 500 index fund.
The S&P 500 is a stock index commonly used as a measure of how the market as a whole is doing. The index consists of 500 of the country's largest companies and is weighted by market capitalization. Market capitalization is calculated by multiplying the total number of shares times the price per share, so this means that companies with higher valuations have an outsized impact on the performance of the index as whole.
Because the S&P 500 is intended to track the performance of these 500 large companies, with larger companies making a bigger impact, its performance is determined by how well America's biggest businesses do over time. And that's one big reason why Buffett recommends this index for most investors. He's made clear he'd never bet against the American economy, and these companies are the driver's of it.
Why bet big on the S&P 500?
An S&P index fund has a number of huge advantages for investors. Those who put their money into an S&P 500 index fund don't have to individually analyze dozens or hundreds of companies to decide which ones to buy stock shares in. Instead, their purchase of the index fund gives them a small ownership stake in a huge number of companies that are household names.
The companies that make up the S&P 500 are also diverse, ranging from Apple (NASDAQ: AAPL) to Harley-Davidson (NYSE: HOG) to Caesars Entertainment (NASDAQ: CZR) to Kohl's (NYSE: KSS). So not only are you investing in established businesses, but you're also benefiting from instant diversification with the purchase of one simple investment. This instant diversification reduces investing risk and is another reason why Buffett's recommendation is a solid one for most people.
Investors who follow Buffett's advice will also benefit from low investing fees. Fees are low because no one has to manually select the stocks included in an S&P 500 index fund, as the fund's composition is simply determined by each company's inclusion in the S&P 500 and its valuation.
Low fees mean investors get to keep more of their returns and their portfolio balance isn't reduced by paying a professional fund manager to individually select investments.
Is this investment really likely to make you a millionaire?
While it's clear there's plenty of benefits to investing in an S&P 500 index fund, the big question is, can you really build a seven-figure nest egg with a single investment that isn't going to outperform the market?
The answer is an unequivocal yes. The S&P 500 has consistently produced average 10% annual returns over the long term. So if you invest just $506 per month over 30 years in an S&P index fund, you'll almost certainly hit your $1 million goal. And the more you invest, the faster you can reach that milestone.
If you want a safe, simple, hands-off investment that requires no effort on your part to make you a millionaire, buying into this Buffett pick is a no-brainer.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
