If investing in the stock market is on your list of New Year's resolutions, you're making a great decision that your future self will thank you for.
Investing in the stock market might seem intimidating, but it doesn't have to be. If you've taken the initial step of opening a brokerage account and funding it, all you need to do now is decide what stocks you want to buy.
Whether you're a beginner or an expert, I can't think of anybody whose advice on this topic is worth following more than that of Warren Buffett, the CEO of Berkshire Hathaway. Buffett is known as the "Oracle of Omaha" because he has been doling out investing wisdom for generations, and his investments have made him and Berkshire shareholders fabulously wealthy.
Berkshire holds dozens of individual stocks, in addition to owning subsidiaries like GEICO and the BNSF railroad. Given his success, you might think Buffett's investing strategy would be complicated, but one of his favorite recommendations is just about the simplest thing you can do. It's also a core element of the instructions he has laid out for his personal wealth when he dies.
The Berkshire chief has directed his estate to put 90% of his wealth into an S&P 500 index fund, arguing, "There's been no better bet than America."
Image source: The Motley Fool.
Investing in the S&P 500 is a great move
The S&P 500 is a stock market index that tracks 500 of the biggest U.S.-based companies. Many of the large-cap stocks that make up the index are household names, like Apple, Wells Fargo, or Chipotle Mexican Grill.
History has also shown that investing in the S&P 500 has paid off. The index has a long-term average annual return of 9%, including reinvested dividends. At that rate, $10,000 would compound into $23,673 in 10 years and more than $56,000 in 20 years. That's not a guaranteed return, but it gives you a sense of how an investment in the index might perform over that timeframe.
It's also hard for even expert investors to beat the S&P 500 because the index refreshes itself every few months, adding new stocks that have earned their membership and booting out underperformers. For example, Airbnb and Uber joined the ranks in 2023, while Advance Auto Parts and Tupperware-parent Newell Brands fell out of the index.
That rebalancing process helps ensure that the S&P 500 owns only the top 500 U.S. stocks, and it does the work of reallocating your investments for you so you don't have to worry about it. That also explains why the index has such a strong track record of growth.
How to invest in the S&P 500
If you're looking to follow Buffett's advice and invest in the S&P 500, the easiest way to do so is by buying an S&P 500 index fund.
Two of the more popular options -- and ones that Berkshire itself owns -- are the Vanguard 500 Index Fund (NYSEMKT: VOO) and the SPDR S&P 500 ETF (NYSEMKT: SPY).
Both exchange-traded funds (ETFs) track the S&P 500 and only charge investors a fraction of a percent to do so. The Vanguard 500 Fund has an expense ratio of 0.03%, meaning you'll pay just $0.03 annually for every $100 you invest in the fund. The SPDR S&P 500 ETF's expense ratio, meanwhile, is a bit higher at 0.09%.
If you can earn the S&P 500's historical average return of 9% each year, you'll be able to double your investment in eight years, and your portfolio will grow even faster if you continue to contribute to it.
There's a reason even Buffett wants his money put into the S&P 500. It's a simple and proven way to build wealth, and it's done so for generations.
If you're looking to start investing, you can make it easy on yourself by following Buffett's lead and buying an S&P 500 index fund.
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Wells Fargo is an advertising partner of The Ascent, a Motley Fool company. Jeremy Bowman has positions in Airbnb, Chipotle Mexican Grill, and Wells Fargo. The Motley Fool has positions in and recommends Airbnb, Apple, Berkshire Hathaway, Chipotle Mexican Grill, Uber Technologies, and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
