Legendary investor Warren Buffett has generated significant returns for shareholders of his Berkshire Hathaway company. From 1964 to 2022, Berkshire had a total return of 3,787,464%.
Given his impressive track record, one might assume that Buffett would want this successful streak to continue through his estate after his death. However, the Oracle of Omaha has a different plan.
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In his 2013 letter to Berkshire shareholders, Buffett shed light on the instructions he included in his will.
“One bequest provides that cash will be delivered to a trustee for my wife’s benefit,” he wrote. “My advice to a trustee couldn’t be more simple: put 10% of your money in short-term government bonds and 90% in a very cheap S&P 500 index fund.”
Buffett recommended using Vanguard’s S&P 500 index fund.
Although this strategy is simple and does not require constant monitoring or active trading, Buffett expressed great confidence in it.
“I believe the fund’s long-term results will be better than those achieved by most investors – whether pension funds, institutions or individuals – who employ high-fee managers as a result of this policy,” he said.
‘The Best Thing’
An S&P 500 index fund is a type of mutual fund or exchange-traded fund (ETF) designed to track the performance of the S&P 500 Index, the primary benchmark for the US stock market. The index reflects the performance of the stocks of the 500 largest publicly traded companies in the US and is often considered a barometer for the overall economy.
While Buffett advocates the daily use of index funds, he doesn’t deny the value of his own business.
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During Berkshire’s 2021 annual meeting of shareholders, Buffett addressed a question about whether his directive to the trustees of his wealth to invest significantly in an index fund represented a lack of confidence in Berkshire’s management.
“Well, no, because we’re talking about well under 1% of my wealth,” he explained, noting that about 99.7% of his wealth will either go to philanthropies or the federal government.
“I think it’s best to buy 90% in the S&P 500 index fund,” Buffett pointed out.
The average person cannot pick stocks
Buffett’s preference for recommending index funds stems from his belief that stock picking is not an optimal strategy for average investors.
At the 2021 shareholders meeting, he bluntly stated, “I don’t think the average person can pick stocks.”
This is where index funds come into play.
Investing in an S&P 500 index fund is not complicated: you simply buy the fund and hold it without having to pick individual stocks.
This is a passive investment strategy. The objective of the fund is to mimic the performance of the index by holding the same stocks in the same proportions as shown in the index. Unlike actively managed funds, where fund managers decide how to allocate assets, index funds try to match the index, not beat it.
Additionally, by investing in an S&P 500 index fund, investors are exposed to 500 large companies in a variety of industries. This diversification can help reduce risk because the fund’s performance is not tied to the success or failure of a single company.
In 2023, the S&P 500 is up 24% — and in 2024, it’s up nearly 6%.
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This article is for information only and should not be construed as advice. It is offered without any warranty.
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