Warren Buffett is well known for his investing prowess — the Oracle of Omaha has made billions due to his smart stock purchases. With his reputation as one of the world’s best investors, it’s not surprising many people watch his purchases and recommendations carefully to inform their own stock-buying habits.
Of course, even Buffett isn’t perfect, so for most of his recommendations, there’s no guarantee you’ll make money. However, Buffett did offer one investment pick that’s virtually a sure thing — and if you follow his advice and invest your retirement savings in it, you’re all but guaranteed to earn a good return over time.
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As close to a sure thing as you can get
So what’s Buffett’s can’t-miss recommendation? It’s an S&P 500 index fund.
Index funds track the performance of a specific financial index — in this case, the Standard & Poor’s 500 Index. The S&P 500 is made up of the 500 largest, publicly traded companies in the U.S. stock market, weighted by market capitalization (the total dollar value of the company’s outstanding stock shares).
Because the index includes virtually all of the biggest U.S. companies, it’s widely viewed as a benchmark index for the stock market as a whole. In other words, if analysts or news articles are saying the “stock market” is going up, it probably means the S&P 500 index is rising in value.
S&P 500 index fund provides you with instant diversification because buying into this index means you own a small piece of 500 large U.S. companies that represent a wide variety of different industries. And because the companies included on the index are usually well-established household names such as Microsoft, Apple, and Facebook, the risks of investing in this index are low.
In fact, if you look at the historic performance of the S&P 500, it’s always gone up over the long term — the index has produced average annualized returns of 9% to 10% over time. The index avoids the concept of trying to time the market too, as every 20 year investment period eluded sustained losses.
That means that while you may experience some short-term losses during market corrections, putting your money into the S&P 500 is virtually guaranteed to earn you a reasonable rate of return over a long enough time horizon. That’s likely why Buffett recommended putting as much as 90% of their money into it — especially if you don’t want to take the time to research individual stocks.
The chart below really helps drive this point home — it shows the performance of the S&P 500 for the last 90 years, with the grey areas showing periods when the US was in a recession. As you can see, there were some dips during troubled economic times, but the overall trend has gone in one direction over time.
Should you follow Buffett’s advice?
Investing in the S&P 500 is one of the best and simplest ways to invest in stocks if you don’t want to take the time to find individual companies to purchase shares of. But while you’ll almost assuredly do well over time by investing in an S&P index fund, you aren’t going to beat the market by doing so.
If your goal is to outperform the broader market, you may be able to do much better than simply sticking your money in an index fund, if you’re willing to put in the work. In fact, investors who made smart buys and purchased stocks such as Netflix or Amazon in the early days would’ve made far more than the average annual return the S&P provided.
But unless you enjoy researching stocks and are excited about spending the time to find companies you believe will do better than the S&P, taking Buffett’s advice on this one is the best move to make.