Key Points
A low-cost index fund adheres to each of Buffett's investment strategies.
Low expense ratios add up over time, maximizing your returns.
No matter how the market is doing at the moment, regular contributions are key.
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For a man with an estimated net worth of $149 billion, Warren Buffett has a remarkably simple investment strategy. Buffett, the retired CEO of Berkshire Hathaway, is all about identifying undervalued assets and holding them for the long term. There's nothing flashy about Buffett's approach, which makes his level of success all the more impressive.
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Ideal for the average investor
Buffett has repeatedly told Berkshire Hathaway shareholders that, for the average investor, the ideal choice is to buy a low-cost S&P 500 index fund and hold it for the long term. Non-professional investors can benefit from a fund that tracks the performance of 500 large U.S. companies and is widely viewed as a snapshot of the overall U.S. stock market and economy. As Buffett sees it, investing in an S&P 500 index fund is essentially betting on the U.S. and its long-term economic growth.
Specifically, one fund Buffett has recommended is the Vanguard S&P 500 ETF (NYSEMKT: VOO). Simply put, the fund provides everything Buffett looks for in a strong investment, including:
- Diversification: A low-cost index fund provides exposure to a broad range of large, successful U.S. companies. The term "broad" matters here because it's essential to spread your risk rather than put all of your money into a single company.
- Low fees: Index funds generally have lower expense ratios than actively managed funds, which helps maximize returns over time. VOO has an expense ratio of 0.03%, or $3 per $10,000 invested annually.
- Market performance: Historically speaking, index funds have outperformed most actively managed funds over the long term.
Regular contributions
Buffett advises investors to make contributions through thick and thin -- especially thin. When you read a headline or hear a newscaster talk about a declining market, keep contributing to the index fund. Buffett believes that American business will do well over time.
The trick, he says, is not to buy the "right" companies, but to essentially buy all the big companies through the S&P 500. There are plenty of winners to choose from.
Buy-and-hold strategy
It's possible that holding on to an investment through thick and thin is made easier by the knowledge that your portfolio is well-balanced. It also helps to know that, when a handful of your holdings lose value, the rest of the index fund can keep your investment afloat. You're not counting on a single business to perform well.
One advantage of a buy-and-hold strategy is that it gives your portfolio time to benefit from compounding. Another is that buying and holding reduces transaction fees and tax implications.
If you don't have the time, experience, or interest to research specific stocks, a low-cost fund does the work for you by mirroring the S&P 500 index.
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Dana George has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway 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.
