Warren Buffett Advises Investors to Invest in Index Funds

The Oracle of Omaha, Warren Buffet is regarded as the greatest investor of this time. Since his $1 million bet in 2008, Warren has grown in fame for his investment strategies and lucky bets.

Warren Buffett's index fund bet

In 2008, Buffett made a bet that a particular index tracker fund would make more money for investors within a decade and pay more than fund managers. With no doubt in his heart about this, he let the investment firm he entered the bet with, Protégé Partners, choose the team that would match his bet. Years later, Buffett’s index tracker has risen by 85% while the other five funds matching him have returned only about 22%.

Buffet's advice on investing in the S&P500 Index Fund

At the Berkshire’s annual meeting for 2020, Buffett said: “For most people, the best thing to do is to own the S&P 500 index fund.”

Warren Buffett has remained confident in his investment in the index fund over the years, even with the economic uncertainties that come with the coronavirus pandemic. As a matter of fact, it is said that Buffett instructed the trustee who will be in charge of his estate, that 90% of his money should be invested into index funds for his widow.

Buffett’s advice 10 years ago

If you had followed Buffett’s advice 10 years ago, your investment would have certainly paid off. Although the stock market is currently experiencing one of its worst bear years, the last decade was one of the best bullish decade for the market.

So, 10 years ago, if you had invested $500 in an ETF that tracks the performance of S&P 500, your investment would have tripled in value, that is, nearly $1,610 by this time. You would have made returns of more than 220%, according to calculations done by Grow.

However, it would have been preferable to invest in an index fund that tracks a major market index like the S&P 500, rather than Buffett’s company, Berkshire Hathaway. In the last 10 years, stock of Berkshire Hathaway has risen nearly 140%, with the exclusion of dividend payments.

‘Diversification’

The major reason why Warren Buffett and other investors are so particular about index funds investment is because of diversification. Index funds provide an easy way to diversify your portfolio at a lower cost. It provides investors with a mix of winning stocks and losing stocks, therefore, investors don’t have to worry about which stocks are performing better from the rest.

“With the exception of Berkshire, I would not want to put all my money in any one company,” Buffett said at his company’s annual meeting. “I would not want to bet my life on whether we beat the S&P 500 over the next 10 years.”