Over the past 30 years, the S&P 500 index has generated a total return of 1,770% (as of June 5). That performance supports the view that the stock market is one of the best asset classes for growing your wealth. A starting sum of $10,000 in this benchmark in June 1996 would be worth $187,000 today. The gains have been even more remarkable over the past decade.
Understanding that this kind of performance can have a profound impact on your financial well-being, it might be time for new investors to direct some of their savings into the stock market. Given how daunting it might seem, it can be difficult to figure out where to even begin.
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Here’s where Warren Buffett comes into the picture. The great investor is also a wonderful educator whose advice is well worth considering. If you’re new to the stock market this month, listen to the Oracle of Omaha’s suggestion.
Keep it simple
Buffett is known for his exceptional capital allocation skills, having compounded Berkshire Hathaway‘s share price at a yearly clip of almost 20% for six decades before stepping down as CEO at the end of last year. But his advice for most investors is surprisingly simple. He basically recommends buying a low-cost S&P 500 index fund.
This perspective probably comes from the fact that the average person doesn’t have the time, ability, or desire to want to pick individual stocks and manage a portfolio. And it stems from the inability of expert fund managers to beat the market.
Active management strategies generally have a bad track record. Data shows that the vast majority of large-cap fund managers lose to the S&P 500 over the long term. Whether these professionals trade too often, charge high fees, or just aren’t adept portfolio managers, that is a very disappointing statistic. And it makes you wonder why more investors don’t choose the passive route.
Consider this popular exchange-traded fund
One of the best options is the Vanguard S&P 500 ETF (NYSEMKT: VOO). It comes with an extremely low expense ratio of 0.03%. Over several years and decades, investors will pay a significantly smaller amount than what active managers typically charge. The difference leaves more money in your pocket.
This ETF tracks the S&P 500 index, so its holdings match the benchmark. The top five holdings are Nvidia, Apple, Microsoft, Amazon, and Alphabet, clearly showing a strong position within the information technology sector. Investors will certainly be exposed to all things related to artificial intelligence.
