Warren Buffett says that almost no one can do what he does, so they shouldn't even try. And his advice is still effective to this day.
For decades, this legendary investor has stated that 99% of people should not attempt to pick winning stocks, get involved in options trading, time-trading, or hire fund managers.
"My consistent advice is to buy low-cost S&P 500 index funds," wrote this retired chairman and CEO of Berkshire Hathaway in a 2017 letter to shareholders.
This benchmark index tracks the performance of the 500 largest publicly traded companies in the United States, and on Tuesday it rose to a record high of 7,819 points.
Since the beginning of this year, the index has risen by 14%, and over the past five years it has almost increased by 80%. Since it fell below 700 points during the financial crisis, it has risen by nearly 1100%.
At 96 years old, Buffett stated that his preferred strategy allows him to avoid high fees that erode investment returns. By holding a widely diversified index, there is no need to identify the best stocks, decide when to buy and sell, balance the portfolio, or engage in leveraged bets that could result in catastrophic losses.
At Berkshire's annual shareholders' meeting in 2008, when answering a question from writer and lifestyle mentor Tim Ferriss, Buffett said that this approach allows people to invest their money and then "forget about it and go back to work."
“You won’t get such advice from anyone, because no one makes money by giving you that kind of advice,” Buffett said. “There will always be people who tell you they can do much better than that, as long as you pay them a fee, or a commission, or whatever it is, but they won’t actually do any better.”
Buffett said that he had also made a similar suggestion to the trustees who would manage the wealth he left to his wife after his death: “Put 10% in short-term government bonds and 90% in a very low-cost S&P 500 index fund.”
“I believe that, following this policy, the long-term outcome for this trust will be better than what most investors—whether they are pension funds, institutions, or individuals—can achieve when using managers with high fees,” he said.
Buffett's advice is rooted in his belief in a bright future for the United States.
"In the long run, stock market news will be positive," Buffett wrote in his famous column "Buy America. That's What I Do" published during the worst times of the financial crisis.
"In the 20th century, the United States experienced two world wars and other costly military conflicts; the Great Depression; more than a dozen recessions and financial panics; oil shocks; influenza epidemics; as well as the resignation of a notorious president," he continued to write. "Yet, the Dow Jones index still rose from 66 points to 11,497 points."
Buffett's confidence in this preferred advice led him to place a bet of $1 million: that after deducting costs, fees, and expenses, the performance of the S&P 500 index fund would outperform a basket of hedge funds over the next decade. He easily won this bet at the end of 2017.
This journalist has been following Buffett's advice in investing for her two young children: since their birth, she has made monthly contributions to a low-fee S&P 500 index fund. To date, the annualized return has been close to 20%.
However, some investors warn that holding stocks in the S&P 500 is not as safe nowadays as it used to be. The top 10 companies by market value account for about 40% of the total value of this market-weighted index, and most of them have invested heavily in artificial intelligence, a burgeoning technology.
For example, NVIDIA's market value is approaching $6 trillion, while the valuations of Apple and Alphabet both exceed $4 trillion, with Microsoft following closely behind at $3.9 trillion.
Other investors, including Michael Burry, who became famous for "The Big Short," have also warned that the influx of large amounts of capital into stocks without discrimination has made the market even more bloated and fragile.
The concentration risk of the S&P 500 does indeed exist; its historical gains are not guaranteed to continue, and the boom in passive investment may also mean that the next collapse could be quite severe.
But at least for now, Buffett's approach is still living up to his reputation.
