It feels ironic to posit that an exchange-traded fund (ETF) Warren Buffett just sold out of could be the smartest investment you could make, but even the Oracle of Omaha himself might agree. He has said many times that most investors should invest in an ETF that tracks the S&P 500, and individual investors shouldn't make the mistake of comparing their personal portfolios to Berkshire Hathaway, which manages billions in its equity portfolio and has different investing goals.
Berkshire Hathaway just sold out of its two S&P 500 index funds, including the Vanguard S&P 500 index fund (VOO +0.75%), but he'd still recommend it for others. Let's see why Buffett likes it so much for individual investors and why it could be the smartest investment you can make today.
It's the stock market, not a slot machine
You may have heard that most fund managers don't beat the market in almost any given year. It seems to be easier to accomplish that feat when the market doesn't do well, which is logical, but it's still hard to beat it even in the tougher years.
For example, in 2022, when the S&P 500 lost 18%, 51% of large-cap equity funds underperformed the market. Last year, when the market gained 25%, 65% of funds underperformed it. The average over the 24 years that S&P Global has been tracking it is 64%, an underwhelming figure.
It's not easy to beat the market. Buffett has done it, and by a landslide over time. But he has cautioned that most people have a day job, and picking stocks is Buffett's day job. If it's not yours, and you're not spending your entire career flying around the country meeting CEOs and poring over financial documents, you're taking on more risk by trying to beat the market.
That doesn't mean you can't beat the market on your own, but owning an index fund in your portfolio helps minimize your risk.
Enter the index fund
There are so many wonderful things about index funds, about the S&P 500 index fund, and about the Vanguard version.
Index funds provide instant exposure to a large assortment of stocks so that you can easily diversify your holdings and access a specific category or trend. It can be something like dividends, artificial intelligence (AI), growth stocks, and many more.
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The S&P 500 ETF gives you access to what's often used as a proxy for the market. If you believe in the market and you know that it has averaged a gain of about 13% annually over the past 10 years, investing in an S&P 500 index fund lets you easily buy into that. It also gives you instant exposure to whatever the hottest trends are at the moment because companies are added or subtracted to the index based on their size, so you get whatever companies are growing without having to make those decisions yourself. Four new stocks set to be included next week include Williams-Sonoma, DoorDash, TKO Holdings, and Expand Energy.
The Vanguard ETF is a solid choice because it has a proven track record with a name many investors know and trust, and it has some of the lowest expense ratios available. The S&P 500 ETF has an expense ratio of 0.03%, whereas it says similar funds are 0.76%.
Why Buffett recommends it
Buffett said that he's advised his wife to invest in index funds after he dies because it's the "best investment," meaning she won't have to worry about it and consider her trades, and money won't be a problem.
For most people, having at least some money in an index fund can provide this kind of security. It may not be the highest-gaining investment you'll ever buy, but with its low risk and reliability, it might be the smartest.
