Warren Buffett built one of the largest fortunes in history by picking stocks. Yet the advice he has given ordinary investors for decades sounds almost boring next to his own record. It is advice that has outlived countless market fads. His instruction has stayed remarkably simple: buy a low-cost S&P 500 index fund and hold it.
That boring advice keeps giving. The S&P 500 set a fresh record high in early October, and Buffett’s go-to recommendation continues to pay off for patient investors. The bigger story is how many people have taken his words to heart.
The advice Buffett never stopped giving
Buffett has made the same point in almost every format he uses. “My regular recommendation has been a low-cost S&P 500 index fund,” he wrote in his 2016 letter to Berkshire Hathaway shareholders, published on Berkshire’s website. He has also said he gave similar guidance to the trustee who will manage the money he leaves to his wife.
Also read: Warren Buffett has a stark message for stock market investors
The details of that plan are telling. In his 2013 letter, Buffett said the trustee should put 90% of the cash in a very low-cost S&P 500 index fund and 10% in short-term government bonds, and he suggested Vanguard’s fund. A man who could hire any manager in the world chose an index fund for his own family.
He repeated the message at Berkshire’s 2020 annual meeting. “In my view, for most people, the best thing to do is owning the S&P 500 index fund,” Buffett said. He added that nobody knows what the market will do tomorrow, next week or next year.
Timing, in his view, should not decide when people invest. In a 2017 CNBC interview, Buffett said the trick is to buy all the big companies through the S&P 500 and to do it consistently, according to The Motley Fool. He also urged investors to keep buying through thick and thin, especially through the thin times. Downturns, in other words, were buying opportunities rather than reasons to sell.
The bet that proved his point
Buffett did more than talk about it. In 2007, he bet Protégé Partners $1 million that an S&P 500 index fund would beat a basket of hedge funds over 10 years, and he won. His Vanguard fund returned 7.1% a year, compared with an average of 2.2% for the hedge funds, as CNBC reported.
Fees help explain the gap. “Costs really matter in investments,” Buffett has said. And index funds still keep those costs low while spreading money across many companies instead of one. A small fee difference can also add up to a large sum over decades of compounding.
