If I Were in My 20s, I'd Buy This 1 ETF Warren Buffett Recommended and Hold It for Decades
Key Points
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Buffett suggests that long-term investing in the S&P 500 is suitable for most investors.
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In a 2013 letter to Berkshire Hathaway shareholders, he said: “I suggest Vanguard.”
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For anybody in their 20s, the Vanguard S&P 500 ETF makes a great foundational holding.
In his 2013 letter to Berkshire Hathaway shareholders, Warren Buffett laid out the advice he’d give to the advisor of his wife’s inheritance:
My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.)
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He didn’t offer this advice specifically for retail investors, but I think it obviously applies. And it’s a pretty clear endorsement of the Vanguard S&P 500 ETF (NYSEMKT: VOO).
While it may not sound like the most exciting investment strategy in the world, over time it’s proven to be one of the most effective for anyone with a multi-decade time horizon.
Why the S&P 500 makes sense for a 20-something investor
The biggest advantage of the Vanguard S&P 500 ETF is that it gives you exposure to hundreds of the U.S. economy’s biggest, most successful companies.
It’s tempting to want to put your money straight into growth, tech, and artificial intelligence (AI) stocks. But the S&P 500 (SNPINDEX: ^GSPC) is one of the best foundational pieces you can own for long-term investing. Only when you have that in place should you start looking at other sector or thematic options.
In the case of the Vanguard S&P 500 ETF, its razor-thin 0.03% expense ratio means that almost every penny your investment earns stays in your pocket. This is especially important if you’re in your 20s and potentially holding your investment for four decades or more. Even small differences in expense ratios can add up to thousands of dollars over the long term.
The other big plus of investing in the S&P 500 is that it evolves. Its market cap-weighted methodology means that larger companies receive greater weight in the index. Half a century ago, names like AT&T and General Motors were among the largest holdings in the S&P 500. Today, it’s companies like Apple and Microsoft. Over time, the index will change as the economy changes.
A few things to be mindful of when investing in the S&P 500
The tech bull market of the past few years has made the index historically top-heavy. The top 10 holdings alone make up nearly 40% of the index, and the tech sector accounts for 40%. That makes it riskier that a reversal of the current tech rally could sink the Vanguard S&P 500 ETF faster than something like an equal-weight S&P 500 fund that isn’t so concentrated.
Also, this is designed to be a long-term holding. That means buying and holding for at least 10 years. The S&P 500 can be volatile, and 20%-plus pullbacks aren’t that uncommon. This is normal behavior and should be expected.
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What’s not a good idea, however, is trying to buy and sell your investment based on short-term events. That tends to hurt long-term returns more than it helps.
The right move for someone in their 20s
If you’re buying the Vanguard S&P 500 ETF, make automatic monthly investments to make your account grow faster and avoid the temptation to try to time the market. If you do that for the next 40 years, don’t be surprised if you’re sitting on a $1 million nest egg when you get to retirement.
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David Dierking has positions in Apple. The Motley Fool has positions in and recommends Apple, Berkshire Hathaway, Microsoft, and Vanguard S&P 500 ETF. The Motley Fool recommends General Motors. The Motley Fool has a disclosure policy.