If investing in the stock market is on your list of New Year's resolutions, you're making a big decision that your future self will thank you for.
Investing in the stock market may seem intimidating, but it doesn't have to be. If you've taken the initial step of opening a brokerage account and funding it, all you need to do now is decide which stocks you want to buy.
Whether beginner or expert, I can't think of anyone whose advice on this topic is worth following more than that of Warren Buffett, the CEO of Berkshire Hathaway. Buffett is known as the "Oracle of Omaha" because he has been dispensing investing wisdom for generations, and his investments have made him and Berkshire shareholders fabulously rich.
Berkshire owns dozens of individual stocks, in addition to owning subsidiaries such as GEICO and the BNSF railroad. Given his success, you might think Buffett's investment strategy would be complicated, but one of his favorite recommendations is the simplest thing he can do. He is also central to the instructions he has laid out for his personal wealth when he dies.
The Berkshire boss has ordered his estate to put 90% of his wealth in a S&P 500 index fundarguing: "There has been no better bet than the United States."
Image source: The Motley Fool.
Investing in the S&P 500 is a great move
The S&P 500 is a stock index that tracks 500 of the largest companies based in the United States. A lot of large cap stocks that make up the index are well-known names, such as Apple, Wells Fargoeither Chipotle Mexican Grill.
History has also shown that investing in the S&P 500 has paid off. The index has a long-term average annual return of 9%, including reinvested dividends. At that rate, $10,000 would become $23,673 in 10 years and more than $56,000 in 20 years. It's not a guaranteed return, but it gives you an idea of โโhow an investment in the index might perform over that time period.
It's also difficult, even for seasoned investors, to beat the S&P 500 because the index is updated every few months, adding new stocks that have earned their membership and removing underperformers. For example, Airbnb and Uber joined the ranks in 2023, while Advanced Auto Parts and Tupperware-father Newell Brands left the index.
That rebalancing process helps ensure that the S&P 500 owns only the top 500 U.S. stocks and does the work of reallocating your investments for you so you don't have to worry about it. That also explains why the index has such a strong growth track record.
How to invest in the S&P 500
If you want to follow Buffett's advice and invest in the S&P 500, the easiest way to do so is to buy an S&P 500 index fund.
Two of the most popular options (and which belong to Berkshire itself) are the Vanguard 500 Index Fund (FLIGHT 0.13%) and the SPDR S&P 500 ETF (TO SPY 0.14%).
Both ETFs (ETF) track the S&P 500 and only charge investors a fraction of a percentage to do so. The Vanguard 500 fund has an expense ratio of 0.03%, meaning you'll pay just $0.03 a year for every $100 you invest in the fund. Meanwhile, the SPDR S&P 500 ETF's expense ratio is a little higher at 0.09%.
If you can earn the S&P 500's historical average return of 9% each year, you can double your investment in eight years and your portfolio will grow even faster if you continue to contribute to it.
There's a reason why even Buffett wants his money invested in the S&P 500. It's a simple, proven way to build wealth, and he's done it for generations.
If you're looking to start investing, you can make it easier for yourself by following Buffett's lead and purchasing an S&P 500 index fund.
Wells Fargo is an advertising partner of The Ascent, a Motley Fool company. Jeremy Bowman He has positions in Airbnb, Chipotle Mexican Grill and Wells Fargo. The Motley Fool holds and recommends Airbnb, Apple, Berkshire Hathaway, Chipotle Mexican Grill, Uber Technologies, and Vanguard S&P 500 ETFs. The Motley Fool has a disclosure policy.
