Warren Buffett is undoubtedly one of the most famous investors of all time. Some would argue that he’s the most renowned investor ever — and it’s for good reason. Buffett’s success, both personally and through his company, Berkshire Hathaway, is undeniable. That’s why when Buffett gives investing advice, people tend to listen.
Luckily, Buffett’s investing wisdom when it comes to retirement is simple: Consistently buy into an S&P 500 index fund over time. When asked for investment advice, it’s his regular recommendation, according to Buffett.
The one-stop shop
The S&P 500 (SNPINDEX: ^GSPC) is the most followed index on the stock market, tracking the largest 500 companies by market cap. Since the index contains large-cap companies and industry leaders from every major sector, its performance is often used interchangeably with the stock market and the economy’s performance as a whole.
An investment in the S&P 500, for all intents and purposes, is an investment in the broader U.S. economy.
The reason an S&P 500 index fund can be your ticket to a comfortable retirement is that it accomplishes four things: diversification, blue chip stocks, low cost, and proven long-term results. As of January 2023, here’s how the S&P 500 is broken down by sector:
- Communication services (7.3%)
- Consumer discretionary (9.8%)
- Consumer staples (7.2%)
- Energy (5.2%)
- Financials (11.7%)
- Healthcare (15.8%)
- Industrials (8.7%)
- Information technology (25.7%)
- Materials (2.7%)
- Real estate (2.7%)
- Utilities (3.2%)
Within those sectors are blue chip companies, which are industry leaders with proven track records of returning great value to shareholders over the long term. Rarely can you go wrong as a long-term investor leaning on blue chip companies.
Arguably one of the biggest reasons Buffett is a fan of S&P 500 index funds is their low fees. When you invest in an index fund or exchange-traded fund (ETF), you always want to pay attention to the expense ratio. The expense ratio is charged as a percentage of your total investment annually, and although differences may seem small on paper, they can really add up over time.
For perspective, let’s compare two funds: one with an expense ratio of 0.03% and one with an expense ratio of 0.30%. If both people invested $1,000 monthly and received 8% average annual returns over 25 years, here’s how their value would roughly differ when accounting for the fees:
|Expense Ratio||Total Value||Amount Paid in Fees|
With just a slight difference of 0.27%, someone could have saved (or paid) over $33,600 in fees. They matter a lot in the long run. That $33,600 difference in fees could be a year’s worth of retirement income for many people.
It’s all about consistency
Historically, the S&P 500 has returned, on average, around 10% annually over the long run. Past results don’t guarantee future performance, but if we assume that trend continues, here’s how roughly much someone could have accumulated in 25 years at different monthly investments:
|Monthly Contributions||Personally Invested||Total Value|
Thanks to compound earnings — which occurs when the money you make on investments begins to make money on itself — you’re able to accumulate much more than you personally invested. But for compound earnings to really work their magic, you need time and consistency. Time is more straightforward: The earlier you begin investing, the better.
Consistency is where investors may have more trouble. It’s easier to remain consistent when your investments are consistently increasing. It’s much harder to remain consistent during down periods when stock prices are dropping seemingly by the day or week. However, it’s usually in your best interest to do so.
One of the best ways to remain consistent is by using dollar-cost averaging. With dollar-cost averaging, you make set investments at specific times, regardless of stock prices. For example, if you decide you can invest $1,000 monthly into an S&P 500 index fund, you might choose to make bi-weekly $500 investments on Fridays. So when Friday comes around, the goal is to invest no matter what.
Sometimes you’ll invest when prices are up; sometimes, you’ll invest when they’re down. The idea is that it’ll even out over the course of a career and save you the stress of trying to time the stock market along the way. Investing for retirement doesn’t have to be (and shouldn’t be) hard. Lots of people are sitting comfortably in retirement by simply investing consistently in an S&P 500 index fund.
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Stefon Walters has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway, short January 2023 $200 puts on Berkshire Hathaway, and short January 2023 $265 calls on Berkshire Hathaway. The Motley Fool has a disclosure policy.