Sometimes the simplest solutions are the best ones.
Warren Buffett has invested for decades using that philosophy. Buying high-quality businesses at good prices and holding them forever, letting their stories play out, has helped him become one of the most successful investors of all time. He also favors simplicity. He doesn’t own hundreds of stocks or dozens of ETFs. He just owns those he has conviction in.
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This simplicity is also evident in his financial estate plans. In his 2013 letter to Berkshire Hathaway (NYSE: BRKA)(NYSE: BRKB) shareholders, he said this: “My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund.”
Buffett has long advocated that most people would be better off investing in the S&P 500 (SNPINDEX: ^GSPC) and calling it a day. It requires no trading or activity. It just invests in hundreds of the biggest and most successful companies in the world.
In indicating that the S&P 500 would be his preferred investment choice for many, he was also specific about which S&P 500 fund he’d choose. “I suggest Vanguard’s,” he wrote. The Vanguard S&P 500 ETF (NYSEMKT: VOO) is the simplest way to invest in the index and comes with an annual expense ratio of just 0.03%.
Why the Vanguard S&P 500 ETF works for most investors
Buy-and-hold investing is usually the best way to create long-term wealth. Anybody who tries to time the market, overtrade, or pick individual winners usually ends up trailing the S&P 500. Simply matching the index’s performance (minus fees) often produces the best outcome with the least amount of work.
Plus, the S&P 500 does a remarkably good job of reflecting what’s driving the economy at any point in time. Right now, it’s the tech sector. At other points this century, it was financials and energy. The best-performing stocks end up getting greater weights in the index and vice versa. This kind of self-rebalancing mechanism helps ensure that an investment in the index evolves as the economy evolves.
Ultimately, most investors are better served participating in the growth of the U.S. economy instead of trying to pick the best stocks. The best and easiest way to do that is to invest in the Vanguard S&P 500 ETF and let long-term compounding of growth do the rest.
