Warren Buffett: This Is the Best Investment Most People Can Buy

Given his reputation as an expert stock-picker, Buffett’s investment recommendation might surprise you.

By Matthew Frankel

Warren Buffett is arguably the best stock picker of all time, so it’s no surprise that during turbulent times, many people ask themselves, “What would Warren Buffett do?” Fortunately, Buffett has discussed what he feels is the best way for most people to invest — and it’s not what you might think.

The best investment for most people to buy

During Berkshire Hathaway‘s (NYSE:BRK-A) (NYSE:BRK-B) annual meeting in late April, Warren Buffett had some harsh words to say about hedge funds and investment consultants, saying they are often detrimental for anyone who follows their advice.

Instead, Buffett argued (as he has many times before) that most investors’ best bet is to put their money into a low-fee S&P 500 index fund that will simply match the market’s performance over time. He mentioned his bet with hedge fund Protege Partners, where he said that over a decade, the Vanguard S&P 500 Index Fund would beat five funds-of-funds picked by Protege. Thus far, from 2008 through the end of 2015, the S&P 500 has beaten the hedge fund’s cumulative return by nearly 44 percentage points (65.7% to 21.9%).

Buffett’s point is that passive investors can do better than “hyperactive” investments, whose managers and other professionals charge hefty fees. Over time, these fees can lower your potential returns by thousands of dollars.

He continued on with his comments for some time, but the general point is that a passive S&P 500 investor is going to do just as well as American industry does, which, throughout history, has done pretty well. Over the long run, and over multi-decade time periods along the way, the S&P 500 has averaged total returns of nearly 10% per year.

It’s important to point out that Buffett recommends this approach for mostinvestors — specifically, those who would otherwise employ professionals to invest their money for them. He was not targeting investors who have the time, desire, and knowledge required to research their own stock investments, much like Buffett has done over the years. People who buy and hold high-quality stocks for the long haul are not exactly “passive,” but they do have the potential to beat the market — a fact of which Buffett is living proof.

Pros and cons of buying a S&P 500 index fund

I’ve already mentioned some of the pros of index fund investing. The first is cost savings — especially when it comes to S&P 500 index funds. In fact, theVanguard S&P 500 ETF (NYSEMKT:VOO) comes with an expense ratio of just 0.05%. This means on a $10,000 investment, you’ll pay just $5.00 per year in fees. Compare this to actively managed mutual funds, which can charge 1% or more, or to the often-astronomical fees hedge fund managers and investment consultants charge.

Another perk is that index investing is as low-maintenance of an investment strategy as you can find that has such strong long-term potential. Simply buy shares of your chosen fund, and let the market do the rest.

Index fund investing also takes emotion out of the equation. According to a study by Dalbar, the average investor’s annualized returns were just 2.6% during the 10-year period from 2004-2013, approximately one-third of the S&P 500’s annual return during that time period. This is mainly because emotion tells investors to do the exact opposite of what they should — panic and sell when the market is falling, and buy when everyone else is at high prices.

The possible downside is that while you won’t lose to the market, you aren’t going to beat it, either. As I mentioned earlier, Buffett as well as other value investors are living proof that with the right research and know-how, it’s possible to create a portfolio of undervalued stocks that can beat the market’s return over long time periods. So, if you have the time to thoroughly research and value stocks, index investing may not be in your best interest.

It’s not for everyone

Buying an S&P 500 index fund puts your investments on auto-pilot, and while you won’t get rich quickly with this approach, you won’t go broke, either. Nor will you pay thousands of dollars in fees to Wall Street investment managers along the way.

However, if you’re willing to put in the homework to research and create a well-diversified portfolio of high-quality stocks to hold for the long term, go for it. That’s what I do, and that’s what The Motley Fool suggests for those who have the time and desire. The point is simply this: Whichever investment strategy you use to achieve them, one of your main goals should be to keep as much of your profits in your pocket as possible, and not in the pockets of hedge fund managers or high-fee investment consultants.

Matthew Frankel owns shares of Berkshire Hathaway (B shares). The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insightsmakes us better investors. The Motley Fool has a disclosure policy.

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Drew Limsky

Drew Limsky



Drew Limsky joined Lifestyle Media Group in August 2020 as Editor-in-Chief of South Florida Business & Wealth. His first issue of SFBW, October 2020, heralded a reimagined structure, with new content categories and a slew of fresh visual themes. “As sort of a cross between Forbes and Robb Report, with a dash of GQ and Vogue,” Limsky says, “SFBW reflects South Florida’s increasingly sophisticated and dynamic business and cultural landscape.”

Limsky, an avid traveler, swimmer and film buff who holds a law degree and Ph.D. from New York University, likes to say, “I’m a doctor, but I can’t operate—except on your brand.” He wrote his dissertation on the nonfiction work of Joan Didion. Prior to that, Limsky received his B.A. in English, summa cum laude, from Emory University and earned his M.A. in literature at American University in connection with a Masters Scholar Award fellowship.

Limsky came to SFBW at the apex of a storied career in journalism and publishing that includes six previous lead editorial roles, including for some of the world’s best-known brands. He served as global editor-in-chief of Lexus magazine, founding editor-in-chief of custom lifestyle magazines for Cadillac and Holland America Line, and was the founding editor-in-chief of Modern Luxury Interiors South Florida. He also was the executive editor for B2B magazines for Acura and Honda Financial Services, and he served as travel editor for Conde Nast. Magazines under Limsky’s editorship have garnered more than 75 industry awards.

He has also written for many of the country’s top newspapers and magazines, including The New York Times, Washington Post, Los Angeles Times, Miami Herald, Boston Globe, USA Today, Worth, Robb Report, Afar, Time Out New York, National Geographic Traveler, Men’s Journal, Ritz-Carlton, Elite Traveler, Florida Design, Metropolis and Architectural Digest Mexico. His other clients have included Four Seasons, Acqualina Resort & Residences, Yahoo!, American Airlines, Wynn, Douglas Elliman and Corcoran. As an adjunct assistant professor, Limsky has taught journalism, film and creative writing at the City University of New York, Pace University, American University and other colleges.