Warren Buffett: How Investing in the S&P 500 Can Make You Rich
Warren Buffett has a fortune worth over $131 billion. He got there by consistently investing in the right companies throughout his multi-decade career. However, Buffett advises the average person against picking stocks like he did.
In the Berkshire Hathaway 2020 meeting, he said, “In my view, for most people, the best thing to do is own the S&P 500 index fund.” But why is that?
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The Power of Time
Despite his success, Buffett has made many investing mistakes throughout his career. According to him, these trace back to the first stock he ever purchased.
Buffett said he was just 11 years old when he made his first investment in the stock market, as reported by Yahoo Finance. In 1942, he purchased a share in a company he liked for $114.75 — the equivalent of nearly $2,200 today.
He didn’t share how the investment performed for him, but Buffett said he wishes he would’ve put the money into a low-cost S&P 500 index fund instead. If he did and never sold, the $114.75 he invested would be worth over $400,000 today.
Buffett said this story shows just how much growth the American stock market experiences throughout one person’s lifetime. That’s why he wants his estate to invest 90% of his wealth in a very low-cost S&P 500 index fund when he passes.
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Buffett: The Average Person Can’t Pick Stocks
At a 2021 shareholders meeting, Buffett told investors in Berkshire Hathaway, “I do not think the average person can pick stocks.” This gets to the heart of why he advises most people to invest in an S&P 500 index fund. To understand why, here’s a quick look at what the S&P 500 is.
The index tracks the performance of the 500 largest publicly traded companies in the United States. It includes 80% of the American equity market. So when you buy the S&P 500, you’re essentially investing in the growth of the American economy over time. History shows that’s a good bet.
How To Invest in the S&P 500 Like Buffett
Buffett knows from personal experience how difficult it can be to buy an index fund and hold it for decades. That’s why he tells investors today, “You don’t want to buy with the idea that you could sell it in two years or three years necessarily, to make money.” He pointed out that you could end up losing money selling too soon.
That’s why the first step in investing like Buffett is adopting a long-term mindset. The average annual return of the S&P is 9.24% over the last 150 years. Even if you lose money for several years, your investment should increase considerably in the long run.
Buffett also says it’s important to choose an S&P 500 fund with low fees. Even a difference of a single percentage point in brokerage fees can eat into your stock market earnings considerably over time. To see how, consider this hypothetical.
Imagine investing $1,000 into the S&P 500 today and adding $50 monthly for the next 40 years. Assume an average annual return of 9.24%, as this is the index’s historical average.
Now, imagine choosing between two S&P 500 funds that charge 1% and 2%, respectively. You’d end up with almost $50,000 more at the end of the 40 years just by choosing the fund with the 1% fee schedule.
So the second rule of investing in the S&P 500 like Buffett is shopping around for the best rates. As this hypothetical shows, small differences can add up to huge results between now and when you want to retire.
Which S&P 500 ETF Should You Choose?
If you’re ready to follow Buffett’s advice and invest in the S&P, the next step is choosing an ETF. Two of the most popular options are the State Street SPDR S&P 500 ETF (SPY) and the Vanguard S&P 500 ETF (VOO).
SPY has the most trading volume and assets under management. But VOO is the smarter buy if you consider cost over time. It has an expense ratio of 0.03%, while SPY charges 0.0945% annually. If your brokerage gives you access to it, the Schwab S&P 500 Index Fund (SWPPX) is an even better option. Its expense ratio is just 0.02%.
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This article originally appeared on GOBankingRates.com: Warren Buffett: How Investing in the S&P 500 Can Make You Rich
