You'll often hear about how important it is to save for retirement. After all, Social Security alone won't cover all of your bills. And if you want a comfortable lifestyle once you stop working, you'll need savings to supplement those monthly checks.
But saving for retirement isn't enough. Inflation can reduce the value of money over time, which is why it's important to invest your nest egg so it grows between now and when you wrap up your career.
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Of course, investing carries risk. Even strong companies can see their stock value decline, which is why diversification is so important.
Building a truly diversified portfolio on your own isn't easy, though. Sure, you could go out and buy dozens of stocks across a range of industries. But do you really have the time and patience to research each one? And are you sure you can commit to keeping tabs on your portfolio over time to make sure it's well-balanced?
If you're not so sure, don't worry -- you're not alone. Managing a diversified portfolio may be more work than you're looking to take on. And if that's the case, investing legend Warren Buffett says there may be a better way.
Why Buffett recommends an S&P 500 ETF
There's a reason Buffett has repeatedly recommended that everyday investors put their money into a low-cost S&P 500 index fund or exchange-traded fund (ETF) rather than try to pick stocks individually. Buying the index gives you instant diversification without all of the legwork.
One ETF you may want to consider is the Vanguard S&P 500 ETF (VOO +0.35%). The fund tracks the S&P 500, which comprises approximately 500 of the largest publicly traded companies in the U.S.
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Key Data Points
By owning shares of the Vanguard S&P 500 ETF, you gain exposure to hundreds of established businesses spanning industries including technology, healthcare, financial services, consumer goods, and energy. And with an expense ratio of just 0.03%, you won't lose much money to fees. In fact, Vanguard says that the average expense ratio of funds similar to its Vanguard S&P 500 ETF is 0.72%.
Why it pays to take Buffett's advice
The fact that Buffett recommends going all-in on a fund like the Vanguard S&P 500 ETF may seem surprising to you, given that he managed to build his fortune by selecting stocks individually. But remember, Buffett had the time, knowledge, and experience to take that approach. He spent his entire career analyzing companies, reading financial statements, and assessing management teams.
The average investor, on the other hand, typically has different priorities and more time constraints. If that sounds like you, a fund like the Vanguard S&P 500 ETF may be a more practical choice.
Pitfalls to know about
Although the Vanguard S&P 500 ETF is a great investment for many retirement savers, it has some drawbacks. First, because it tracks the S&P 500, you're missing out on exposure to smaller companies that could have significant growth potential. The fund also doesn't let you dabble in international stocks, which could be good for diversification purposes.
Also, the S&P 500 is weighted by market value, which means companies with the largest market caps have an outsize influence on the index's performance. Right now, for example, tech stocks make up a large portion of the S&P 500, which makes the Vanguard S&P 500 ETF less diversified than you might expect.
Of course, there's also volatility to consider. Just as the value of an individual stock could swing wildly, so too can the value of the Vanguard S&P 500 ETF go up or down on a whim.
However, if you're investing for a milestone like retirement that's many years away, you shouldn't let that volatility scare you off. It's normal for stocks values to fluctuate. And the more time you have in the market, the more likely you are to come out ahead financially.
All told, the Vanguard S&P 500 ETF is ideal for retirement savers looking for a simple, low-cost way to accumulate wealth. If that sounds like you, then there's nothing wrong with following Buffett's advice and taking the easy approach to investing -- even if Buffett himself may have gone a very different route.
