Warren Buffett is known as one of the best stock pickers of all time. So when he says that something is a great investment, people tend to listen.
Well, Buffett has called one specific investment the best thing most Americans can do to put their money to work. It's not Berkshire Hathaway (BRK.A -0.01%) (BRK.B -0.09%), the conglomerate he has run since 1964, and it isn't any other publicly traded company. And you might be surprised at what a simple investment it is.
The best investment for most people
Buffett has said several times that the best investment most people can make is a simple S&P 500 index fund. Buffett views an investment in the S&P 500 as a bet on American business, and that's a bet that has historically worked out very well. As Buffett said in his 2016 letter to Berkshire shareholders: "American business -- and consequently a basket of stocks -- is virtually certain to be worth far more in the years ahead." Buffett has even suggested that his own wife should invest her money in index funds if he dies first.
In fact, Buffett wagered $500,000 for charity in 2007 that a low-cost S&P 500 index fund would outperform a portfolio of five hedge funds chosen by an investment professional. Buffett won the bet handily.
To be perfectly clear, if you have the time, knowledge, and desire to invest in individual stocks, it's entirely possible to beat the market over time. Buffett is living proof of that. But the reality is that most Americans don't have all three of these qualities, and therefore should simply invest in the entire stock market (the S&P 500 is a good representation), a move Buffett has called a "bet on America." Even if you own individual stocks, a low-cost S&P 500 index fund can serve as an excellent backbone to your portfolio.
How will an S&P 500 index fund perform over time?
Many investors don't realize the compounding power of simple index funds over time and think that you need to try to beat the market to build long-term wealth. But that's simply not the case.
Consider this example. From 1965 through 2022, the S&P 500 averaged an annualized 9.9% total return for investors. Let's say you set aside $500 per month starting now in an index fund that tracks it. Here's how your money could grow over time:
|
Years |
Total Investment Contributions |
Ending Value (9.9% Annual Returns) |
|---|---|---|
|
5 |
$30,000 |
$36,558 |
|
10 |
$60,000 |
$95,167 |
|
15 |
$90,000 |
$189,130 |
|
20 |
$120,000 |
$339,772 |
|
30 |
$180,000 |
$968,469 |
|
40 |
$240,000 |
$2,584,382 |
Data source: Author's own calculations.
To be sure, there's no guarantee that the S&P 500 will match its past performance. And this isn't to discourage motivated and knowledgeable investors from trying to do even better. But the figures in this table illustrate Buffett's quote: "It is not necessary to do extraordinary things to get extraordinary results."
Which S&P 500 index fund should you buy?
There are several excellent S&P 500 index funds with low fees available in the market. And generally speaking, you should look for an expense ratio below 0.10% and a reputable fund manager.
In Berkshire Hathaway's own stock portfolio, there are small positions in two particular S&P 500 index funds, and this might be a smart place to start. They are the SPDR S&P 500 ETF Trust (SPY -0.29%) and the Vanguard S&P 500 ETF (VOO -0.29%). Of the two, the Vanguard example has the lowest costs, with an expense ratio of just 0.03%, but both are quite inexpensive and should allow you to essentially match the index's performance over time.
