Why would an S&P fund almost avoid doubling your money in a decade?
Buffett’s advice does not just make investing easy and helps you reduce the risk of loss. It also gives you a really good chance to double your money relatively quickly.
The S&P 500 has historically produced an average annual return of approx. 10%. This does not mean that you will earn 10% every year – sometimes you earn more, sometimes less. But it is an average over time.
Let’s say you invest $ 1,000 and you don’t quite earn the 10%, but you have an average annual return of 8%. You would still end up doubling your money over the course of a decade, with your nest egg worth more than $ 2,100 at the end of 10 years with no further contribution on your part.
This return is not guaranteed 100%, as there have been 10-year spreads that have underperformed even this average. But an S&P 500 index fund is the closest you can get to a sure thing because of its very long and very consistent track record. And the longer you leave your money alone, the greater the chances that you will get these 10% historical average returns.
Now investing in an S&P fund will not let you beat the market – you will have to invest in individual stocks to do it. But it will give you a very realistic chance of doubling your money over a decade while taking a limited amount of risk. That’s what makes it such a good Warren Buffett recommendation.
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