Warren Buffett's success in the stock market has put him in a position where people tend to listen when he speaks. One of the best things about Buffett's success is that it didn't take an extraordinary strategy or advanced techniques to achieve it, just patience and consistency.
If you're looking for Buffett advice that can help guide your retirement savings, look no further than his constant message that all it takes is consistent investments in an S&P 500 index fund.
The one-stop shop for investors
The S&P 500 is an index that tracks the largest 500 public U.S. companies. An S&P 500 index fund or exchange-traded fund (ETF) is a fund put together by a financial institution to mirror the S&P 500. Since S&P 500 ETFs mirror the same index, there's usually no real tangible difference between them aside from maybe cost, but you can't go wrong with the Vanguard S&P 500 ETF (VOO 1.34%).
NYSEMKT: VOO
Key Data Points
What makes the S&P 500 so great for retirement investing is that it accomplishes many things with a single investment. For one, it provides investors with instant diversification, containing major companies from all 11 major sectors. As one of the key pillars of investing, accomplishing diversification in a single investment can remove a lot of hassle for investors.
Within the S&P 500 are also many blue chip stocks. Blue chips are well-established household names with a history of consistent and stable earnings, cash-filled balance sheets, and industry leadership. Investing in blue chip stocks is good because they generally provide more stability and have a track record of withstanding bad economic conditions.
In the latest Berkshire Hathaway shareholders letter, Buffett referred to the S&P 500 as "an elite collection of large and well-known American companies." If there were a label I'd love my investments to receive from Buffett, it's likely that one.
You never want to overlook the fees
An often overlooked part of investing is the amount different ETFs charge for investing in them (called the expense ratio). Buffett has always been critical of the high fees Wall Street charges to actively manage funds that often underperform the S&P 500. Many of these expense ratios may look ignorable on paper, but even the slightest difference can add up to a good amount over time as your portfolio value grows.
One of the best things about most S&P 500 ETFs is their cheapness.
The Vanguard S&P 500 ETF, for example, only has a 0.03% expense ratio. The Fidelity Nasdaq Composite Index ETF -- which tracks one of the three main stock market indexes -- has a 0.21% expense ratio. This slight 0.18% difference seems small until you look long-term.
Let's imagine two scenarios where you invest $1,000 monthly into the two ETFs, averaging 10% annual returns over 25 years. Below is the difference in fees paid over that span.
| ETF | Expense Ratio | Amount Paid in Fees |
|---|---|---|
| Vanguard S&P 500 | 0.03% | $5,311 |
| Fidelity Nasdaq Composite Index | 0.21% | $36,638 |
Calculations by author.
That slight difference in expense ratios accounted for over $31,000 in fees. That amount of money is important at any time in life, but especially in retirement.
You can't deny the historical results
Arguably the best reason for leaning on the S&P 500 for your retirement is that it's been proven to work. Historically, the S&P 500 has averaged around 10% annual returns long-term (Vanguard's S&P 500 ETF has averaged over 13% since its September 2010 inception).
Historical results don't guarantee future performance, and you should never invest fully expecting that to continue, but an investment in the S&P 500 is, for all intents and purposes, an investment in the broader U.S. economy. Is it a 100% guarantee the U.S. economy will continue to grow? No. Is it very likely? Yes.
The key is to remain consistent and trust in the long-term results. Using the historical S&P 500 returns of 10%, here's the value of different monthly investment totals after 25 years:
| Monthly Investment | Value After 25 Years |
|---|---|
| $500 | $590,082 |
| $1,000 | $1.18 million |
| $1,500 | $1.77 million |
| $2,000 | $2.36 million |
Calculations by author.
Thanks to compound earnings, consistent investments over time can generate great value and set you in a great position to be financially comfortable in retirement.
