As an investor, you may have some lofty goals. Maybe you're hoping to amass a $1 million nest egg for retirement. Or maybe you simply want to reach the point where money doesn't have to be an ongoing concern.
But to achieve your objectives, you'll need to invest wisely. And that can be a challenge when you don't know much about hand-picking stocks or aren't comfortable going that route.
Someone who is comfortable hand-picking stocks is Warren Buffett, one of the most successful investors of our time. Buffett's portfolio has consistently beat the market, making him a billionaire many times over.
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While Buffett's strategy has clearly worked well for him, the investing giant actually recommends that everyday investors take a different approach to building their portfolios. And if you don't know much about choosing stocks, you'll appreciate his suggestion.
Invest in the broad market
You'll often hear that a diverse portfolio is an important thing to have on the road to growing wealth. But you don't need to load up on a whole bunch of different individual stocks to achieve that. Instead, you can simply put your money into the broad market by investing in index funds.
Index funds are passively managed funds, and their performance is tied to different benchmarks. An S&P 500 index fund, for example, will aim to do as well as the S&P 500 itself. If you buy shares of an S&P 500 index fund, you'll effectively get to own 500 different companies -- without having to go out and buy shares of each one.
To be clear, the broad market doesn't always deliver stellar performance. The S&P 500, for example, has had plenty of years when it's landed in the red. But since 1957, it's delivered an average annual return of about 10.5%. That accounts for strong years and terrible years, alike.
Meanwhile, if you invest $400 a month in an S&P 500 index fund over a 40-year period, your portfolio might enjoy an average annual 10.5% return. And that would, in turn, leave you with over $2.4 million to your name.
Take Buffett's advice
The reason Buffett is such a strong advocate of index funds for everyday investors is that they take the guesswork out of the equation. They can also, to some degree, help you avoid taking on undo risk in your portfolio.
The downside of buying index funds is that they won't help you outperform the market. To do that, you'll need to choose specific stocks and hope you've made the right call.
There's nothing wrong with employing that strategy if you're comfortable with it. After all, it's clearly worked wonders for Buffett himself.
But if that's not a route you feel confident about, there's absolutely nothing wrong with taking Buffett's advice and falling back on index funds, instead. Doing so may give you more peace of mind as an investor. And that could, in turn, prevent you from making rash decisions down the line that cause you to lock in needless losses.
