Investing Insights: Warren Buffett’s Endorsement of the S&P 500
Warren Buffett is one of America’s most renowned investors. Since 1965, Berkshire Hathaway has experienced a remarkable growth in share price, increasing at an annual rate of 20%. In contrast, the S&P 500 (SNPINDEX: ^GSPC) has returned approximately 10% annually, even with dividends reinvested, during that same timeframe.
As a result, many investors keenly follow the stocks Buffett trades, using SEC Forms 13F to stay informed. However, a vital piece of advice from Buffett often goes overlooked. At Berkshire’s 2021 annual meeting, he stated, “For most people, the best thing to do is to own the S&P 500 index fund.” This advice has been reiterated, with Buffett specifically recommending the Vanguard S&P 500 ETF (NYSEMKT: VOO).
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Transforming Your Investment: The Value of Consistent Contributions
Imagine investing $500 each month and turning that into $986,900 over 30 years. This is achievable when utilizing an S&P 500 index fund like the Vanguard S&P 500 ETF.
Diversification Through the Vanguard S&500 ETF
The S&P 500 tracks 500 of the largest U.S. companies, representing a blend of value and growth stocks across all 11 market sectors. This index constitutes 80% of domestic and 50% of global equities by market value. The Vanguard S&P 500 ETF offers a way for investors to diversify their investments across many of the world’s most impactful companies.
The forefront of this index fund is comprised of the following top ten positions:
- Apple: 7.1%
- Nvidia: 6.7%
- Microsoft: 6.2%
- Amazon: 3.8%
- Alphabet: 3.5%
- Meta Platforms: 2.5%
- Tesla: 1.9%
- Berkshire Hathaway: 1.7%
- Broadcom: 1.6%
- JPMorgan Chase: 1.4%
The Case for an S&P 500 Index Fund
Buffett asserts that an S&P 500 index fund represents the best route for most investors looking to gain stock market exposure. The challenge of selecting profitable individual stocks often requires more dedication than what most investors can offer, leading to underwhelming portfolio performance.
He articulated this sentiment in his 2013 shareholder letter, emphasizing that the average investor should not obsess over picking winners but should instead “own a cross-section of businesses that in aggregate are bound to do well.” According to Buffett, an S&P 500 index fund fits perfectly into this strategy.
Moreover, even seasoned money managers find it challenging to outperform the S&P 500. According to S&P Global, in the last five years, less than 5% of large-cap funds exceeded the index’s performance, a point that Buffett reiterated in his 2014 letter to shareholders.
Image source: Getty Images.
Projected Growth of the Vanguard S&500 ETF
Over the past 30 years, the S&P 500 has increased by 2,170%, yielding an annual return of 10.9%. This period witnessed varied economic conditions, promising a likelihood of similar returns in the next 30 years. However, using a conservative estimate of 10% annual growth, a monthly investment of $500 would accumulate to $95,600 in ten years, $343,600 in twenty years, and potentially reach $986,900 in thirty years.
For investors unwilling to pick individual stocks, seeking higher returns may prove difficult elsewhere, especially considering the nominal fees involved. The Vanguard S&500 ETF has a notably low expense ratio of 0.03%, translating to an annual fee of only $3 for every $10,000 invested.
Personally, I maintain a substantial portion of my investments in the Vanguard S&500 ETF, while allocating the rest to individual stock selections. This method allows me to optimize my returns when my individual stocks perform well, while also mitigating potential losses.
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*Stock Advisor returns as of December 16, 2024
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. JPMorgan Chase is an advertising partner of Motley Fool Money. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Trevor Jennewine has positions in Amazon, Nvidia, Tesla, and Vanguard S&500 ETF. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Berkshire Hathaway, JPMorgan Chase, Meta Platforms, Microsoft, Nvidia, S&P Global, Tesla, and Vanguard S&500 ETF. The Motley Fool recommends Broadcom and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. 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.
