Key Points
Warren Buffett has built his fortune, the fortune of others through his leadership at Berkshire Hathaway, and his reputation thanks to his stock-picking skills. The billionaire, who has retired as CEO of the holding company but remains chairman, knows how to identify a quality company — and he makes the wise move of holding onto such companies for the long term.
This stock-picking strength helped Buffett lead Berkshire Hathaway to a compounded annual gain of nearly 20% over six decades. So investors generally pay close attention when Buffett makes an investing move or offers advice — his words may play a key role in our quest to build wealth.
Today, Buffett’s wisdom may be particularly appreciated as a certain amount of uncertainty has weighed on investors’ minds. Indexes have soared, with the Dow Jones Industrial Average even reaching beyond 53,000 for the first time ever in recent days. But ongoing conflict in Iran, technology companies’ high spending on artificial intelligence (AI), and the approach of earnings season have made investors more cautious.
Let’s check out the following surprising investment Buffett has recommended for all investors during any market environment — he’s even invested in it himself. Here’s how it’s turned out, according to history.
Buffett’s investing strategy
First, though, let’s take a quick look at Buffett’s general approach to investing. The billionaire favors companies with a strong competitive advantage, or a moat, that may ensure steady earnings growth over time. He also is a fan of stocks that offer dividend growth and the financial profile to support this — such as his longtime holdings Coca-Cola and American Express, for example.
Buffett won’t invest in a company at any valuation, though. He believes in getting in on a stock when it’s reasonably priced. And, as I mentioned above, this investing giant holds on for the long term.
Now, let’s consider the investment Buffett has recommended for all investors. I say that it’s a surprising choice because it isn’t one particular stock and doesn’t require stock-picking skills. This investment is an S&P 500 index fund — Buffett has favored the Vanguard S&P 500 ETF (NYSEMKT: VOO) and invested in it in the past.
Betting on the S&P 500
This Vanguard fund, and others like it, invest in all of the S&P 500 members to replicate the benchmark’s performance. So, when you buy shares of the fund, you’re betting on this major index.
Why is Buffett a believer in this investment? For one simple reason: “American business has done wonderfully over time and will continue to do so (though, most assuredly, in unpredictable fits and starts),” Buffett wrote in his 2013 letter to shareholders. And this investment allows investors access to this range of top American businesses.
But has Buffett been right over time? Here’s how it’s turned out, according to history. Since the S&P 500’s launch in the late 1950s, its average annual return has been 10%.
And since the Vanguard fund’s inception date, in 2010, it’s replicated the S&P 500’s gain of more than 500%.
VOO data by YCharts
We can also see in the chart above that every downturn was followed by a recovery, and the fund went on to gain. So, history is telling us that Buffett is right and investing in the Vanguard S&P 500 ETF or another S&P 500 index fund is the right move — and one you could make during any market environment — as long as you hold on for a number of years. This investment has never disappointed over the long term.
This doesn’t mean you should abandon stock picking. Like Buffett, you could watch the market for opportunities and aim to get in on quality stocks at reasonable prices. At the same time, though, you might consider adding shares of an S&P 500 index fund to your portfolio. Buffett says it’s a winner, and history has clearly demonstrated that he’s right.
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American Express is an advertising partner of Motley Fool Money. Adria Cimino has positions in American Express. The Motley Fool has positions in and recommends American Express, Berkshire Hathaway, and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
