The world's greatest investor has given the same advice to ordinary investors for decades. Here's what he actually said.
Warren Buffett — arguably the greatest investor of the 20th century — has consistently given ordinary investors a surprising recommendation: don't try to pick stocks. Buy index funds instead.
This advice appears repeatedly in his annual letters to Berkshire Hathaway shareholders and in numerous interviews. For investors who don't have Buffett's skills, resources, and time, he believes a low-cost S&P 500 index fund is the optimal long-term investment.
In 2007, Buffett made a public $1 million bet that a simple S&P 500 index fund would outperform a portfolio of hedge funds over 10 years. He won decisively. The Vanguard S&P 500 fund returned 7.1% annually over the period; the hedge funds returned just 2.2%.
This bet became one of the most famous demonstrations of passive investing's superiority over active management for ordinary investors.
In his 2013 letter to shareholders, Buffett revealed his instructions for his estate after his death: put 90% of the cash into a very low-cost S&P 500 index fund and 10% in short-term government bonds. He specified Vanguard as the manager.
The man who built a $100+ billion fortune through active stock picking advised his own family to use passive index funds. That's a powerful endorsement.
Buffett on index funds: consistently advises ordinary investors to buy low-cost index funds and avoid attempts to pick individual stocks or time the market. His core message: costs matter enormously, active management rarely beats the market long-term, and patience beats sophistication for most investors.
Buffett's advice aligns perfectly with academic research on investing. For the vast majority of investors without specialized knowledge, time, or resources, a low-cost S&P 500 index fund held for decades is the evidence-backed path to long-term wealth building.