If you are a new bee investor, pick a fund that tails the S&P 500 and put your money in it. At least that’s what ace investor Warren Buffet says. Buffet has made a career out of picking up the right stocks at the right time, even though Ji’s advice sounds overtly simplistic. Buffett has repeatedly recommended S&P 500 index funds as a simple way for average investors to build wealth over the long term.
Buffett directly called the S&P 500 index fund “the best thing” for most investors. “For most people, the best thing to do is to own the S&P 500 index fund”, said Buffet, the founder of Berkshire Hathaway, during the company’s 2020 annual meeting when explaining how ordinary people should approach investing, according to The Motley Fool.
He had already made a major public bet on the ability of an S&P 500 fund to beat professional active investors. In 2008, Buffett famously bet $1 million that an S&P 500 fund would outperform a group of five hand-picked hedge funds over a 10-year period.
S&P 500 ETF
Buffett’s bet ended with a major win for the simple index strategy. Over the 10-year period, his S&P 500 investment generated total returns of about 126%, while the five actively managed funds produced average total returns of only about 36%, according to The Motley Fool.
Buffett also planned to put his own family’s money into an S&P 500 index fund. In 2013, he revealed that after his death, 90% of the cash bequest for his wife would be invested in an S&P 500 index fund. He specifically suggested Vanguard for that investment.
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Long-term returns
One reason investors choose an S&P 500 ETF is its long-term track record. An ETF such as the Vanguard S&P 500 ETF (VOO) gives investors a simple way to own a portfolio that tracks the S&P 500. The S&P 500 is not guaranteed to make money every year. But the index has historically shown strong results when investors stay invested for long periods.
The long-term record is especially important. According to analysis from Crestmont Research cited by The Motley Fool, every 20-year period for the S&P 500 since 1919 has ended with positive total returns.
Another major advantage is diversification. The S&P 500 includes stocks from about 500 of the largest U.S. companies, allowing investors to spread their money across many major businesses instead of depending on just one or two stocks.
Compound growth
The S&P 500 is also capable of creating serious wealth through regular investing. Its appeal is not just that it is relatively stable; it can also benefit from compound growth when investors keep adding money over many years. Historically, the S&P 500 has delivered an average annual return of around 10%. That figure is based on its long-term historical performance and is not a promise that investors will earn 10% every year in the future.
For example, an investor putting $200 into an S&P 500 ETF every month could potentially build a large portfolio over time if returns stay close to the historical average. After 40 years, the $200 monthly investment could reach approximately $1.062 million.
Buffett built his fortune by picking individual stocks, but he believes most ordinary investors do not need to do that. An S&P 500 ETF removes much of the research and effort involved in choosing individual companies, although its returns may not match those of a highly successful individual-stock portfolio.
In short, Buffett’s message to the average investor is clear: you do not need to become Warren Buffett to build wealth in the stock market. A simple S&P 500 index fund, regular contributions and enough time could potentially do much of the work.