Warren Buffett: The Smartest Thing You Can Do With Your Money Today

This article was updated on April 11, 2015.

Much has been said about where Warren Buffett puts his money. But do you know where Buffett thinks you should put yours?

After all, one of the reasons Buffett has been so successful is his ability to invest in big-name companies such as Coca-Cola, and countless others, at just the right time. That's part of the reason Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) has grown from a small textile firm valued at $18 million into one worth nearly $350 billion.

Yet his advice on where we should put our money will surprise you.

In the following video, Buffett speaks to the beauty of the U.S. economy, and how one of the most successful strategies is finding an index fund that simply matches the returns delivered by the S&P 500 offered at a low cost. 

He says far too many people "jump in at the wrong time," or simply make investments they shouldn't because they haven't been able to truly grasp the dynamics of the business and its relative value. Buffett suggests that in the same way he can't write prescriptions, many people shouldn't attempt to beat the market by trying to pick winners and losers.

And this isn't just his advice to others, but in fact to his family as well. In his latest annual letter to Berkshire Hathaway shareholders, Buffett provided an honest admission of where the fortune he was leaving to his wife would go:

My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard's.) I believe the trust's long-term results from this policy will be superior to those attained by most investors -- whether pension funds, institutions, or individuals -- who employ high-fee managers.

So why should we listen? Consider that a recent paper by Vanguard revealed "68% of U.S. large-cap value equity funds [i.e., mutual funds] underperformed their benchmarks over the ten years ended December 31, 2013."

In other words, if the majority of professional investors can't even outperform the market, it should come as no surprise Buffett suggests individuals shouldn't try either.

At times we think we must attempt to beat the market just as Buffett has. But there truly is value in simply joining him in it by putting our money into index funds. While they may be boring, they're undoubtedly valuable.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 26, 2014, at 3:27 PM, erich69 wrote:

    "Today" is relative and I believe this article can be taken out of context. While Buffett is a bottom up investor he still keeps an eye on the macro picture. He has had sold out of the market when he knew it was overvalued. Most investors would argue that while today's market is not vastly overvalued it is in the fair to somewhat overvalued level so putting money into buying the s&p500 at current levels is risking dollars to make pennies. I am curious as to how one's investing thesis may change through time by taking a contrarian view in relation to current trends. If the majority of the population is investing in index funds because they have had that info beat into their heads repeatedly with the efficient market hypothesis, I would argue that this opens up opportunity for a contrarian who is willing to do their homework and stay in control of their emotions. If everybody is buying index funds, that means there are plenty of lousy companies seeing their valuations escalate unjustly. When sentiment turns and everyone is dumping index funds then the fantastic companies will decline in price just like their inferior competitors. This presents an opportunity for a stock picker to select the best of the bunch and outperform the market. If you are committed to indexing, then it would be in your best interest to buy the s&p500 after a large decline and not currently which is into the 5th year of a bull market run.

  • Report this Comment On July 26, 2014, at 8:27 PM, mman5513 wrote:

    If you have $250,000 that ratio will keep you happy...

  • Report this Comment On July 26, 2014, at 8:36 PM, mjs28s wrote:


    "He has had sold out of the market when he knew it was overvalued"

    Buffett does NOT buy or sell based on the "market". He buys and sells individual businesses based on their specific fundamentals.

    Trying to correlate his buying and selling to the overall market is foolish, not Foolish as in this website but the other kind of foolish. Buffett is not going to look at the S&P500 level. Buffett looks for values to buy and sells when he feels a holding is not going to do what he bought the stock in the business for in the first place.

    Try reading more about Buffett but don't conflate his moves into anything that has to do with the overall market or market timing.

    Kind of ironic that after you conflate Buffett to a market timer and then go on a rant about index funds. Many people use index levels as their means to time the market. Buffett has nothing to do with that style of investing. A market timer often knows little to nothing about the financials of the stocks in the indexes that they use as there are just too many. Nor will they typically know anything about the economy other than radio or tv talk show host opinions.

  • Report this Comment On July 26, 2014, at 9:55 PM, apawling wrote:

    @erich69. - I think there are two things to remember about Buffett in this context:

    1. He has a multi-billion dollar conglomerate business that spins off cash regularly, which means he can both invest opportunely AND be in the market at the same time- most individuals have to choose one or the other.

    So for example, if you as an individual wait to buy an index "on the dips" what happens if two years go by and there is no significant correction? Answer: you miss two years of returns in equities sitting in cash or low yielding short duration bonds.

    2. Buffett is a highly regarded public figure that is constantly being asked how to invest- he needs to weight the advice that he gives against the audience that is going to act on it-which potentially

    everyone. Realistically, he has to say "don't try this at home".

    If you want to look for a contrarian angle on all the indexing that is going on, I would recommend buying companies that are removed from indexes. Often the reason has nothing to do with the company and more to do with having an "x" number of consumer companies and and "x" number of industrial companies, etc etc. When a stock is removed from an index, all the index funds dump it simultaneously and this usually depresses the price well below fair value.

  • Report this Comment On July 27, 2014, at 5:27 AM, erich69 wrote:

    @mjs28s - I have read quite a bit about Buffett...he is a true value investor and doesn't buy overvalued equities, you might want to study further back in the history of his life: Here's a brief timeline from the late 60s

    1967: In October, Warren writes to his partners and tells them he finds no bargains in the roaring stock market of the '60s. His partnership is now worth $65 million.

    1967: Buffett is worth, personally, more than $10 million. He briefly considers leaving investing and pursuing other interests.

    1969: Following his most successful year, Buffett closes the partnership and liquidates its assets to his partners. Among the assets paid out are shares of Berkshire Hathaway. Warren's personal stake now stands at $25 million. He is only 39 years old.

    1970: The Buffett Partnership is now completely dissolved and divested of its assets. Warren now owns 29% of the stock outstanding in Berkshire Hathaway. He names himself chairman and begins writing the annual letter to shareholders.

    For a more detailed analysis of Buffett's moves:

  • Report this Comment On July 27, 2014, at 5:51 AM, Mathman6577 wrote:

    One thing that can be done if you think the market is overvalued is to invest in foreign stocks (thru an index fund like VEU).

  • Report this Comment On July 27, 2014, at 11:53 AM, Blackhawk wrote:

    I'm addressing ONLY Investor Fools over 55 and/or retired.

    I am sick and tired of any and everyone quoting Warren Buffet said.................and said and said.

    EXCEPT the quote by him above.

    My play portfolio wise -

    40% long, medium and short bonds ETFs, say Vanguard

    35-40% dividend paying stocks with 10% in Utilities

    Balance - Growth stocks

    Rest for now in cash.

    So say you have a million bucks:

    250K - stocks/ETFs inclusive bonds

    250K - Cash CDs, foreign currency etc.

    500K - Real cash that can be invested on a correction/ have a couple of ounces of gold for real emergencies!

    Just a thought,

    Fool On

  • Report this Comment On August 16, 2014, at 3:01 PM, The1MAGE wrote:

    This is great advice for people who don't know what their doing. (90+% of the population.)

    For the person who thinks he knows what he's doing, but isn't sure, or is learning, put at least 75% into Buffet's plan, then take the 25% and invest it yourself. Every year you successfully beat the market, move 5% into active. Every year you lose, move 5% into passive.

    If after a decade, (or less,) if that active account isn't greater then 25% of the account, then it's unlikely you are beating the market, and the work isn't worth it.

  • Report this Comment On October 29, 2014, at 4:57 PM, Celery198736 wrote:

    You just have to live below your means and make sacrifices.

    Life will always have the makers and the takers. The makers will usually work hard and live reasonably within their means. The takers will usually not put the effort in and blame others for their "unfair bad luck", then want the makers to pay for them in the name of "fairness". The simple truth is everyone has a choice and if you choose to live below your means and save you will save. Period.

    Most will say they can't live below their means because ..(insert excuse here). How many of these people that simply can't save anything have I phones, computers, WIFI, new cars, big screen TV's with cable, eat out all the time, etc.

    Of course they look at me like I'm crazy when I suggest they cut a $100+ a month cable bill. Or drive a car that is 3 years old. Or only fill up their tank from the cheapest place according to GasBuddy. Or get $25/month budget car insurance from 4AutoInsuranceQuote. Or cook their own food instead of spending a hundred a week on restaurant food (or far more if they like the bar).

    We make the beds we lie in. Be responsible for yourself.

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Patrick Morris

After a few stints in banking and corporate finance, Patrick joined the Motley Fool as a writer covering the financial sector. He's scaled back his everyday writing a bit, but he's always happy to opine on the latest headline news surrounding Berkshire Hathaway, Warren Buffett and all things personal finance.

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