When we think about big names in the investing space, it's hard to gloss over Warren Buffett. But while Buffett has been overwhelmingly successful at beating the market, it's not a strategy he advocates for everyday investors. Rather, Buffett is a firm believer in one investment that has the potential to make the average investor quite wealthy, only without the risk that could come with hand-picking stocks in an effort to outperform the broad market.
Why index funds are a great pick
Whether you're new to investing this year or are simply looking to grow your portfolio, you have many choices for building wealth. You could, for example, load up on cryptocurrency if you have a strong enough appetite for risk. Or, you could choose a bunch of different stocks that you think have solid growth potential.
While Buffett may approve of the latter move if you're an educated investor and know what you're doing, he'd probably shake his head at the idea of putting money into digital coins. The investing giant has made it clear that he's not a fan of crypto and considers it risky and worthless.
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At the same time, Buffett is a big advocate of broad market index funds, like S&P 500 index funds, for everyday investors who want to enjoy solid growth without taking on undue risk. Index funds are passively managed funds that have the goal of matching the performance of the benchmarks they follow.
Now, index funds aren't without flaw. When you buy them, you don't get a say in the investments they're loaded with, and they also won't help you generate a higher return than what the broad market delivers.
But the benefit of buying broad market index funds is that they take the guesswork out of investing. And also, they allow for instant diversification in your portfolio.
When you buy shares of an S&P 500 index fund, for example, you're effectively putting your money into the 500 largest publicly traded companies in the market today. You're also setting yourself up to benefit when the S&P 500 does well.
Now to be clear, the S&P 500 won't always do well. It may, over time, have strong years and bad years. But between 1957 and 2021, it's delivered an average annual 10.5% return. And so if you put $5,000 into some S&P 500 index funds this year, sit back, and do nothing, you'll end up with about $100,000 in 30 years if your investments deliver that same 10.5% average return.
Furthermore, let's say you steadily invest in S&P 500 index funds over time. If you put $500 a month into these funds over a 30-year period and manage to snag that average annual 10.5% (which, again, accounts for both good and bad years), you'll end up with $1 million portfolio -- all without having to put in a ton of effort.
Take Buffett's advice
To be clear, Buffett himself isn't loaded up on index funds. The reason? He doesn't have to be. As a stock-picking genius, he can afford to look outside of index funds and take on different levels of risk.
But if you're closer to the average investor than Buffett himself when it comes to stock-picking knowledge, then you may want to follow Buffett's advice rather than his lead and load up on broad market index funds this year. Doing so could make you incredibly wealthy over time.
