Over the past couple of decades, the stock market has been a wealth-building machine. The S&P 500 (^GSPC +0.61%) has earned total returns of more than 330% over the past 10 years alone, which would have quadrupled your money in that time.
Famed investor Warren Buffett is known for his savvy stock-picking abilities, but his advice for investors looking to replicate his strategy is simpler than you might think. Here’s his No. 1 tip for building life-changing wealth.
Image source: The Motley Fool.
Buffett’s advice: Don’t just choose stocks
In Berkshire Hathaway‘s 2021 letter to shareholders, Buffett discussed the investing strategy he and former business partner Charlie Munger shared. He noted that the stocks with the most earning potential come from healthy companies.
“Please note particularly that we own stocks based upon our expectations about their long-term business performance and not because we view them as vehicles for timely market moves,” he explained. “That point is crucial: Charlie and I are not stock-pickers; we are business-pickers.”
This advice is more important than ever, as many stocks have experienced explosive growth over the past few years. Stock price alone doesn’t always tell the full story, and plenty of shaky companies behind fast-growing stocks could crumble under the weight of a recession.
If you’re investing in companies with weak fundamentals and the market takes a turn for the worse, there’s a chance those stocks will crash hard and struggle to recover. Businesses with robust foundations might still wobble during a downturn, but they’re more prepared for volatility and will often have a better long-term growth outlook.
Where should you invest right now?
The right investment for you will depend on your goals and risk tolerance. If you’re looking for a low-maintenance investment that’s highly likely to perform well over time, the S&P 500 ETF may be a smart option.
Buffett himself often recommends this investment. During Berkshire’s 2020 annual meeting, he even called it “the best thing” for most investors.
This type of ETF tracks the S&P 500 and aims to mirror its long-term performance. It’s a slow-but-steady fund that won’t earn you explosive overnight returns, but it’s consistent, reliable, and very likely to recover from periods of volatility.
Just keep in mind that S&P 500 ETFs can only earn average returns, so they can’t beat the market. That may not necessarily be a deal-breaker, but if you’re looking to build as much wealth as possible in the stock market, individual stocks can make it easier to maximize your earnings with a tailor-made portfolio.
As stock prices soar, right now can be a smart time to invest in the market and supercharge your finances. Just be sure you’re choosing healthy businesses with long-term growth potential, as they’re the most likely stocks to weather any volatility and generate positive total returns over time.
