Warren Buffett Believes This Index Fund Is The Best Option For Everyday Investors
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Warren Buffett has garnered so much fame for his financial acumen that investors hang on his every word. The “Oracle of Omaha” recently shared his opinion on why he believes the S&P 500 index fund is the best option for everyday investors who want to build wealth and diversify.
“Keep it simple, stupid,” is a mantra that Warren Buffett has employed to great effect when it comes to investing. He has a rather simple but incredibly effective strategy of backing companies with large market shares in sectors with high demand for their products. That philosophy has served him well, but he’s also aware that everyday investors may not have the time to do deep dives into companies like his Berkshire Hathaway analysts.
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Many investors opt to work with high-profile financial managers or invest in whatever “hot” hedge fund comes down the pike. As you might expect, a simple man like Buffett disagrees with both tactics. He feels so strongly about it that in 2007 he offered to pay $1 million to a fund manager who could beat his returns if he parked his money in the S&P 500 index fund for the next 10 years.
The only fund manager who took the challenge was Ted Seides of Protégé Partners, and he gave up before the 10 years were over. It’s not that fund managers weren’t smart, or didn’t have individual years where their investments outperformed the index. Buffett knows investing is a marathon, not a sprint, and over time the S&P 500 index fund has been a proven winner.
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That, more than anything else, explains why Buffett is such a big fan. More importantly, the S&P 500 has been steadily performing since 2017, which was the end of Buffett’s 10-year bet. According to OfficialData.org and public filings, a $100 investment in the S&P 500 index fund in 2017 would be worth $302.83 today. That’s a 202.83% ROI and annual growth of 15.19% per year. It’s hard to argue with that kind of success.
Performance matters, but it’s not the only consideration. Even if a hedge-fund manager’s investments outperformed the S&P 500 index fund over a prolonged period, it may not necessarily result in bigger returns for investors. The reason for that is fees. Many of the highest performing private equity and hedge funds have high fee structures, and that money comes right out of investors’ pockets.
By contrast, Vanguard’s S&P 500 Index Fund only charges .03%, meaning fees on a $500k investment would be just $150 annually. You’d be hard pressed to join a gym and pay only $150 in annual membership dues. When you add that to the diversified holdings in an S&P 500 index fund, it’s easy to see why Buffett is a fan. Low fees and diversification let you kill two birds with one stone.
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Buffett’s other reason for being a big proponent of the S&P 500 is perhaps even more pragmatic. The companies in the index are some of the best performing businesses in America and run by some of the country’s most capable executives. In that sense, investing in the S&P 500 is akin to investing in the American economy, which Buffett believes in very strongly.
Buffett declared his unwavering belief in American business in a 2022 letter to Berkshire Hathaway shareholders. The letter plainly stated that Buffet had “yet to see a time when it made sense to make a long-term bet against America,” during his several decade long career as an investor. That’s a pretty strong endorsement, and if you’re inclined to agree with Warren Buffett, you may want to take a look at an S&P 500 index fund.
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