Warren Buffett, widely regarded as one of the foremost stock pickers globally, has consistently emphasized the merits of a simple investment strategy for the average investor. Despite his own reputation for selecting winning stocks through his company, Berkshire Hathaway, he suggests that most individuals would be better off with a straightforward approach: investing in an exchange-traded fund (ETF) that tracks the performance of the S&P 500.
During the 2020 annual meeting of Berkshire Hathaway shareholders, Buffett reiterated his advice that owning an S&P 500 index fund, such as the SPDR S&P 500 ETF Trust or the Vanguard S&P 500 ETF, is often the best route for everyday investors. He has championed this passive investment strategy since his 1993 letter to shareholders, where he pointed out that a “know-nothing investor” could outperform many investment professionals by routinely investing in index funds.
The supporting data strengthens Buffett’s position. Standard & Poor’s ongoing analysis of mutual funds accessible to U.S. investors shows that a staggering 79% of large-cap funds underperformed the S&P 500 in the previous year alone. This trend is not merely a coincidence or the result of short-term variability; over the past five years, 89% of these funds failed to match the benchmark. Looking back 15 years, nearly 90% of large-cap funds did not keep pace with the S&P 500, and those few that did often did not sustain their success across different timeframes.
Buffett’s assertion highlights that outperforming the S&P 500 often relies more on luck than on skill. This underperformance trend has also been observed in hedge funds and actively managed ETFs, which face similar challenges compared to key market benchmarks.
For individual investors who may feel that they have an edge over professional funds, the reality is that consistent outperformance is still highly unlikely. While smaller-scale investors can transact without the burdens of market-moving concerns that larger funds face, the statistical chances of consistently beating the market remain slim.
Therefore, for those looking to maximize returns without taking on excessive risks, following Buffett’s guidance and investing in options like the SPDR S&P 500 ETF Trust or Vanguard S&P 500 ETF could prove to be a prudent foundational strategy for their investment portfolios.
