Warren Buffett is one of the most successful investors in history. He has led Berkshire Hathaway to annual returns of 19.8% between 1965 and 2023. This is nearly double the return of the S&P 500 over the same period.
Buffett has amassed a personal fortune of over $127 billion. Despite his success, Buffett has never recommended Berkshire Hathaway stock to the average investor. Instead, he believes most people should invest in an S&P 500 index fund.
“I recommend the S&P 500 index fund, and have for a long, long time to people. And I’ve never recommended Berkshire to anybody,” Buffett said at Berkshire’s annual meeting in 2021. The S&P 500 tracks 500 large U.S. companies.
These companies must meet certain criteria to be included. They must have positive earnings in the most recent quarter and the last four quarters. They must also be worth at least $18 billion, with half of that value available for public trading.
The S&P 500 covers about 80% of the U.S. stock market and 50% of the global stock market by value. An S&P 500 index fund, such as the Vanguard S&P 500 ETF, lets investors spread their money across all these companies. Buffett sees this as the best option for most investors.
Investing in S&P 500 funds
He believes the S&P 500 exposes a broad range of businesses bound to do well over time. The S&P 500 has produced a positive return over every 20-year period in history.
Over the last 30 years, it has returned 2,090%, or 10.8% per year on average. While past performance doesn’t guarantee future results, similar returns are likely in the decades ahead. Assuming a more conservative 10% annual return, investing $500 per month in the Vanguard S&P 500 ETF could turn into $95,600 after ten years.
After 20 years, it could grow to $343,600. And after 30 years, it could reach $986,900. The Vanguard S&P 500 ETF has a meager expense ratio of just 0.03%, meaning investors pay only $3 per year for every $10,000 invested.
An S&P 500 index fund can be a great complement to a portfolio of individual stocks. It provides broad exposure to both value and growth stocks across all market sectors. Investors can still aim to outperform the market with their stock picks.
However, owning an S&P 500 fund ensures their overall portfolio performs well even if their individual stocks underperform. The S&P 500 has proven to be a consistent wealth generator over many decades. As Warren Buffett recommends, it remains an excellent core holding for most investors.
Investing in an S&P 500 index fund each month is a simple and effective way to build substantial wealth over the long term.
