Of course, even Buffett isn’t perfect, so for most of his recommendations there isn’t guarantee you will earn money. However, Buffett has come up with an investment choice that’s pretty much a sure thing – and if you take his advice and put your retirement savings into it, you’re almost guaranteed to earn a good return over time.
As close to a sure thing as it gets
So what’s Buffett’s must-see recommendation? It’s a 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 US stock market, weighted by market capitalization (the total dollar value of the company’s outstanding shares).
Since the index includes virtually all of the largest US companies, it is widely regarded as a benchmark for the stock market as a whole. In other words, if analysts or newspaper articles say the “stock market” is going up, it probably means that the S&P 500 Index is going up.
The S&P 500 Index Fund gives you instant diversification because buying this index means you own a small chunk of 500 large US companies that represent a wide variety of different industries. And because the companies included in 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 historical performance of the S&P 500, it has always increased over the long term – the index has produced average annualized returns of 9% to 10% over time. The index also avoids trying to time the market, as each 20-year investment period escaped sustained losses.
This means that while you may suffer short-term losses during market corrections, placing your money in the S&P 500 is virtually guaranteed to earn you a reasonable rate of return over a sufficiently long time horizon. That’s probably why Buffett recommended investing up to 90% of their money there, especially if you don’t want to take the time to research individual stocks.
The chart below really helps to make this point stand out – it shows how the S&P 500 has performed over the past 90 years, with gray areas indicating times when the US was in a recession. As you can see there have been some lows during tough economic times, but the general trend has been in one direction over time.
Should you take Buffett’s advice?
Investing in the S&P 500 is one of the best and easiest ways to invest in stocks if you don’t want to take the time to find individual companies to buy stocks for. But while you will almost certainly do well over time by investing in an S&P index fund, you are not going to beat the market by doing so.
If your goal is to outperform the market as a whole, you may be able to do a lot better than just sticking your money into an index fund, if you’re willing to do the job. In fact, investors who have made smart purchases and bought stocks such as Netflix or Amazone in the early days, it would have made much more than the average annual return provided by the S&P.
But unless you like equity research and are keen on spending time finding companies that you think will do better than S&P, taking Buffett’s advice on this is the best decision to make.