If there's anyone qualified to define the best investment, it's Warren Buffett. He's the billionaire investor who runs Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B), the $600 billion holding company that owns Geico auto insurance, See's Candies, and many more.
In a 2017 interview, Buffett had this recommendation for investors: "I think it's the thing that makes the most sense practically all of the time. ... [to] consistently buy an S&P 500 low-cost index fund." Four years later, Buffett repeated his advice, saying, "I recommend the S&P 500 index fund and have for a long, long time to people."
Owning the S&P 500
An S&P 500 index fund owns all or most of the stocks in the benchmark S&P 500 index. The index, by its own definition, represents "leading companies in leading industries." These leading stocks must meet strict requirements for market capitalization, liquidity, and profitability.
You can buy all stocks in the index individually, but it's far easier to own an S&P 500 index fund, as Buffett recommends. There are many S&P 500 index funds available, and from known fund families like Vanguard, Charles Schwab, Fidelity, State Street's SPDRs, and BlackRock's iShares.
The low-cost index fund
Sticking with Buffett's advice, your best option is a low-cost fund -- or a fund with a low expense ratio. The expense ratio is the percentage of your investment that covers the fund's operating costs.
Vanguard S&P 500 ETF (NYSEMKT: VOO), for example, has an expense ratio of 0.03%. This means you pay $3 annually for every $10,000 you have invested. To be clear, you don't pay this amount directly -- there's no line item on your statement. Those costs are embedded in the fund's returns.
A few bucks a year may not seem like much, but fund expenses cut into your bottom line over time.
Say you want to invest $10,000 annually in an index fund for 20 years. Choose the Vanguard fund that charges 0.03% for expenses, and the projected future value of your investment is $405,506. That assumes a market-average growth rate of 7% per year after inflation.
Alternatively, you could invest the same amount in the Rydex S&P 500 Fund, which has a much higher expense ratio of 2.31%. Your projected balance after 20 years is $320,030 -- some $85,000 less. Shocking, right?
The importance of consistency
In addition to the "low-cost" tip, there's another critical element of Buffett's advice to follow: Invest consistently. He means that literally. Invest what you can each month without fail, regardless of what's happening in the market.
Consistent investing is easier and can be more profitable than timing your trades. It's easier because you make fewer decisions, and you don't have to worry about what the market will do tomorrow or next week. And it helps your gain potential by producing (on average) a lower cost basis, compared to trading only when the market's strong.
Simple investing, the Buffett way
A recurring investment in a low-fee S&P 500 index fund is a simple solution to the complex problem of wealth-building. It almost seems too easy. But history shows that consistent investing in leading U.S. stocks produces returns averaging about 7% annually, after inflation.
At that rate of return, you'll double your money about every 10 years. That sounds pretty promising, right?
10 stocks we like better than Vanguard S&P 500 ETF
When our award-winning analyst team has a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
They just revealed what they believe are the ten best stocks for investors to buy right now... and Vanguard S&P 500 ETF wasn't one of them! That's right -- they think these 10 stocks are even better buys.
*Stock Advisor returns as of August 17, 2022
Charles Schwab is an advertising partner of The Ascent, a Motley Fool company. Catherine Brock has positions in Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Berkshire Hathaway (B shares) and Vanguard S&P 500 ETF. The Motley Fool recommends Charles Schwab and recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B shares). 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.
