Warren Buffett has spent decades building a fortune by picking individual stocks, yet when it comes to advice for everyday investors, his recommendation is remarkably simple: buy a low-cost S&P 500 index fund and hold onto it for the long haul. Specifically, he has pointed investors toward the Vanguard S&P 500 ETF, and the reasoning comes down to a reality that even professional money managers struggle to overcome. Beating the market is extraordinarily difficult, and most attempts to do so end up costing investors more in fees than they gain in returns.
Buffett has been singing the praises of passive indexing since as far back as 1993, when he told shareholders that index funds had delivered better results for shareholders than Wall Street professionals as a whole. The data backs him up. S&P Global releases an annual scorecard comparing actively managed large-cap funds against the S&P 500, and over the past quarter century, only three years saw the majority of those funds outperform the index. Buffett was so confident in this approach that in 2007 he made a public bet that an S&P 500 investment would beat a basket of hedge funds over ten years. He won handily.
Part of what makes Vanguard’s offering particularly appealing in Buffett’s eyes is its rock-bottom expense ratio of just 0.03 percent, among the lowest you will find anywhere in the ETF market. In his 2013 shareholder letter, Buffett revealed that he had instructed that upon his passing, his wife’s trust should place 10 percent of its cash in short-term government bonds and 90 percent in a very low-cost S&P 500 index fund, specifically suggesting Vanguard’s. He noted two key reasons for the choice: his confidence that it would outperform other options over time, and the minimal fees that would eat away at returns.
Perhaps most importantly, Buffett recognizes that most people have day jobs and cannot spend their hours poring over financial statements the way he does. For them, trying to build and manage a portfolio of individual stocks is not only impractical but potentially risky. His prescription for building wealth is refreshingly straightforward: contribute money consistently, stay invested through market ups and downs, and give your investments time to grow. It may not be glamorous, but as Buffett’s own track record suggests, following the simplest path is often the smartest move an investor can make.
