Investing legend Warren Buffett wants you to keep it simple and trust index funds when it comes to investing your money.
“I don’t think most people are in a position to pick single stocks,” he said during the Berkshire Hathaway annual shareholders meeting, which was held virtually this year from Omaha, Nebraska. “A few [are], maybe, but on balance, I think people are much better off buying a cross-section of America and just forgetting about it.”
In other words, buy a low-cost index fund — Buffett recommends the S&P 500, which holds 500 of the largest companies in the U.S., from Google to Disney to ExxonMobil — and hold onto it for a long period of time.
Using index funds is a passive investment strategy that allows you to take advantage of the success of major corporations without the risks associated with buying individual stocks. It’s nearly impossible for the average investor to consistently pick the right stocks to “beat the market.” Studies show you’re better off owning the whole market with a low-cost index fund. This also removes the significant company risk of an individual stock drastically underperforming the market.
Rather than owning just one or a few stocks, you’re better off owning a bunch of different companies. Some of your shares will likely take off, while others will remain neutral and some will drop. History shows you should see favorable long-term results: The average annualized total return for the S&P 500 index over the past 90 years is around 10% before adjusting for inflation.
Buffett isn’t the only expert who champions index funds. Certified financial planner Peter Mallouk says that if you are ready to dip your toe into the markets, “you should put your money in just one thing: the S&P 500.”
“It’s the lowest cost investment that exists,” Mallouk tells CNBC Make It. “You can buy it at a discount custodian, like a TD Ameritrade, Fidelity or Charles Schwab, where the trading fees are exceptionally low. And with those 500 stocks, you now own about 80% of the market capitalization of the entire United States.” In other words, an S&P 500 fund covers about 80% of the U.S. stock market, so it’s an easy and affordable way for investors to capture core U.S. stock market performance.
Plus, “you have global exposure,” Mallouk says, “because these companies get a lot of their earnings overseas: McDonald’s has shops in China, and Walmart has locations in Europe. So you wind up with a low-cost, diversified portfolio that’s invested in the global economy.”
In short, if you’re looking for a good, reliable place to invest your money, go with low-cost index funds. And stay the course, even when you see market fluctuations or a bad headline, Buffett says. “Keep buying it through thick and thin, and especially through thin. … American business is going to do fine over time, so you know the investment universe is going to do very well.”