It's not surprising that many investors watch eagerly for news of Warren Buffett's stock trades. The Oracle of Omaha has made a successful career (and lots of money) picking stocks.
But while there's a lot you can learn from Buffett, investing like him may not be the best move. His investing goals, his portfolio, and the size of his pocketbook are likely quite different from yours. Instead of emulating his trades, you may be better off listening to his advice -- and in particular, the guidance about which investment he believes most people should own.
What investment does Buffett recommend for most investors?
Buffett's advice for the average investor is simple and easy to follow: Invest in an S&P 500 index fund.
Index funds track the performance of market benchmarks. The S&P 500 index Buffett recommends specifically attempts to mimic the performance of 500 large-cap U.S. stocks that, together, account for 80% of all U.S. market capitalization.
To be included in the S&P 500, companies must meet certain criteria, including having positive reported earnings for a certain number of quarters and having a reasonable price per share. The index is also weighted by market capitalization, which means each company's representation is proportional to the total value of all of its outstanding shares.
When you invest in the S&P 500, you're making a bet on large American companies that have a proven track record. In fact, when you buy an S&P 500 index fund, you'll take a tiny ownership stake in companies you're almost assuredly familiar with, including Amazon, Apple, Clorox, Coca-Cola, Johnson & Johnson, JPMorgan Chase, and Ralph Lauren.
Why does Buffett recommend investors buy the S&P 500 index fund?
As you may be able to guess from the list above, the S&P 500 gives you exposure to businesses across different industries, including tech companies, retailers, and those selling consumer goods. And that's great news, because when you buy into an S&P index fund, you're pretty much instantly diversified.
Diversification isn't the only benefit, though. Your returns will parallel the performance of the index, which -- between 1926 and 2018 -- provided average annual returns of around 10%. It's very difficult for the typical investor to consistently beat that performance over a sustained period.
Investors trying to time the market can also get themselves into trouble, but putting your money into an S&P 500 fund all but eliminates the risk of buying high and selling low (at least for those who leave their money alone for the long term). In fact, anyone who has ever put their money into an S&P 500 index fund and left it alone for at least 20 years would've ended up profiting even if they bought in when stocks were at their most expensive. And S&P 500 index funds don't require active management since they simply include the stocks that make up the index, so they come with few fees that eat away at investment returns.
In sum, you don't have to time the market, you don't have to consistently pick winning stocks, and you don't have to worry about paying high fees if you buy an S&P 500 index fund. It's a simple, easy way to bet big on America and maximize the chance of earning a generous return while minimizing risk, so it's no wonder Buffett thinks it's the best bet for most people who don't spend their entire careers evaluating investments.
And while Buffett and other disciplined investors can definitely do better picking individual stocks than investing in an S&P index fund, you need to really be willing to put in the work to do that. Unless you're committed to developing a sound investment strategy and becoming an expert in the industries you invest in, taking Buffett's advice and putting your money into this safe, simple investment for the long run may be the best financial move you'll make.