Warren Buffett, the Oracle of Omaha, is known for his sage investing advice and unparalleled track record. Through his holding company, Berkshire Hathaway, Buffett owns about 45 equity positions and outright controls over 60 companies. However, two investments stand out in his portfolio for their simplicity and accessibility to everyday investors: The SPDR S&P 500 ETF Trust (NYSEMKT: SPY) and The Vanguard S&P 500 ETF (NYSEMKT: VOO). Both ETFs track the S&P 500, offering investors a piece of the overall market.
Though these ETFs represent a minuscule portion of Berkshire Hathaway’s massive portfolio, Buffett’s reasoning for including them is clear. He believes strongly that S&P 500 index funds are the best investment for most people. Here’s why he thinks you should consider them, too.
Most Investors Can’t Beat the Market
At Berkshire Hathaway’s 2020 annual meeting, Buffett laid it out plainly:
“In my view, for most people, the best thing to do is to own the S&P 500 index fund.”
Buffett, who has consistently outperformed the market over decades, acknowledges that such success is rare. Berkshire Hathaway’s annualized gains since 1965 stand at 19.8%, far exceeding the S&P 500’s 10.2% annualized return over the same period. But he knows this level of outperformance is the exception, not the rule.
For most investors and even professional money managers, beating the market is tough. In any given year, a significant majority underperform—last year, 60% of large-cap fund managers lagged behind the S&P 500.
Index funds simplify the process by mirroring the market’s performance. They also save investors money, with low expense ratios like SPDR’s 0.09% and Vanguard’s even lower 0.03%, compared to the higher fees charged by active money managers.
Index Funds Are for Everyone
Buffett’s advice isn’t just for novices; it’s universal. At the 2021 Berkshire Hathaway annual meeting, he emphasized:
“I like Berkshire, but I think that a person who doesn’t know anything about stocks at all … ought to buy the S&P 500 index.”
Why? Time. Most individual investors don’t have the bandwidth to analyze stocks deeply. Managing a portfolio isn’t just complex—it’s time-consuming. By investing in an index fund, you’re effectively buying into the U.S. economy’s long-term growth without needing to micromanage.
Buffett’s belief in the resilience of the American market underpins his endorsement of index funds. Speaking at the 2020 meeting, he said:
“I will bet on America the rest of my life.”
A Path to Steady Wealth Creation
For many, the dream of “beating the market” feels necessary to achieve wealth, but Buffett flips the script. His advice suggests you don’t need to outpace the market to reach your goals.
Let’s say you retire with $1 million. A 10% return—the S&P 500’s historical annualized performance—yields $100,000 in a year. That’s a comfortable income, without the added stress of active trading or speculation.
Buffett even recommended this approach for his own family. In 2021, he said:
“For a given individual, particularly my wife, I just think that … the best thing to do is buy 90% in an S&P 500 index fund.”
The Buffett Blueprint for Investors
Warren Buffett’s investment philosophy is built on simplicity, patience, and trust in the broader market. Index funds like SPDR and Vanguard provide:
- Diversification: A slice of every major industry and company in the U.S. economy.
- Low Costs: Significantly lower fees than actively managed funds.
- Ease of Access: A straightforward way to invest, regardless of expertise.
For retirees, index funds offer stability. For young investors, they provide a solid foundation for long-term growth. And for everyone in between, they’re a reminder that investing doesn’t have to be complicated.
Take a Cue from Buffett
Buffett doesn’t just talk the talk; he invests his own money in S&P 500 ETFs. By following his lead, you’re not just buying into a fund—you’re buying into a proven strategy for wealth creation.
So, whether you’re new to investing or a seasoned pro looking to simplify, consider taking Buffett’s advice:
“Own the S&P 500 index fund. It’s the best decision for most people.”