Laura Grande
5 min read
Warren Buffett has long argued that most investors are better off not trying to pick the next big winner in the stock market. Instead, he favors a low-cost fund that tracks the S&P 500, along with the patience to hold it through the market’s ups and downs.
It’s advice that may surprise people who know Buffett for his bets on individual companies like Apple and Coca-Cola. But he has often said that what works for him isn’t necessarily what most investors should do.
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He made the case again in a 2008 conversation about index funds with author Tim Ferriss, pointing to the financial industry’s reluctance to recommend an approach that doesn’t generate much in fees.
“You will not get that advice from anybody because nobody gets paid to give you that advice,” Buffett said at the time.
There’s more money in selling investors products that promise to beat the market than in recommending a fund designed to follow it. For anyone who doesn’t want to spend evenings poring over company earnings and weighing which stocks to buy, owning a slice of the broader market can be a more practical option.
Why Buffett thinks investors should keep it simple
An S&P 500 fund lets investors buy into hundreds of major U.S. companies in one shot, rather than trying to figure out which individual stocks should have a place in their portfolio. The appeal is less about excitement than avoiding the time and expense of trying to outperform the market on your own or hiring a financial advisor to do it for you.
That effort doesn’t always pay off, though — even for professionals. Fund managers may charge for their expertise, but that doesn’t mean they’ll make you more money than a more cost-effective index fund. Buffett has previously argued that most investors would be better off taking what the market gives them rather than paying a fund manager to try to beat it.
He put that argument to the test in 2008 when he wagered $1 million that an S&P 500 index fund would beat a group of hedge funds over the following decade. By the time the bet ended in 2017, the index fund had come out well ahead after fees.
