Tristan Harrison is one of the longest-serving writers at The Motley Fool Australia. Tristan has been contributing ASX news and stock analysis articles since 2016. His aim is to help Australians learn about great ASX shares, with a focus on ASX dividend shares and undervalued ASX growth shares. He holds an advanced diploma from the Association of Accounting Technicians and is enrolled in the Chartered Institute Management Accountant (CIMA) qualification program.
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Warren Buffett is one of the world's greatest investors, and he has created enormous wealth for himself and numerous others thanks to his company, Berkshire Hathaway.
But he's not recommending that investors buy Berkshire Hathaway shares. Instead, he suggests people (including his wife) should invest in a particular fund.
Buffett thinks that a low-cost S&P 500 Index(SP: .INX) exchange-traded fund (ETF) is the way to go for lots of investors. On the ASX, investors can choose the iShares S&P 500 ETF (ASX: IVV) to get exposure.
Consistently buy an S&P 500 low-cost index fund. I think it's the thing that makes the most sense practically all of the time. Keep buying it through thick and thin, and especially through thin.
The temptation when you see bad headlines in newspapers is to say, well, maybe I should skip a year or something. Just keep buying.
American business is going to do fine over time, so you know the investment universe is going to do very well.
For Buffett, low cost is a key advantage of these sorts of ETFs:
Costs really matter in investments. If returns are going to be seven or eight percent and you're paying one percent for fees, that makes an enormous difference in how much money you're going to have in retirement.
The iShares S&P 500 ETF has an annual management fee of 0.04%, which is one of the cheapest ETFs on the ASX. A fee of just 0.04% is almost nothing, leaving nearly all of the investment returns in the hands of the investor. There aren't any performance fees either.
I'll also point out that this investment gives investors strong diversification. It owns holdings in 500 companies, which is a very good number. These 500 aren't just random businesses. They are 500 of the biggest and most profitable companies in the world, many of which have a global earnings base.
The biggest positions in the S&P 500 include names like Microsoft, Apple, Nvidia, Amazon.com, Alphabet, Meta Platforms and Warren Buffett's Berkshire Hathaway itself.
Past performance is not a guarantee of future performance
The names in the portfolio sometimes change, but the long-term performance has been very good, thanks to the strength of the S&P 500.
Over the past decade, the IVV ETF has returned an average of 14.9%, though there's no guarantee the next few years will be as good as that, though central banks lowering interest rates may help. I can see why Warren Buffett likes it so much.
Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Alphabet, Amazon, Apple, Berkshire Hathaway, Meta Platforms, Nvidia, and iShares S&P 500 ETF. The Motley Fool Australia has recommended Alphabet, Amazon, Apple, Berkshire Hathaway, Meta Platforms, Nvidia, and iShares S&P 500 ETF. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
As detailed, the Vanguard S&P 500 ETF lets investors spread money across many of the most influential American businesses. Buffett finds that compelling. "American business -- and consequently a basket of stocks -- is virtually certain to be worth far more in the years ahead," he wrote in his 2016 shareholder letter.
Underlying Buffett's recommendation for an S&P 500 index fund is the need for diversification. It's seen right there in his statement during the 2020 shareholder meeting -- some businesses will outperform expectations and some will underperform expectations.
ETFs offer advantages over stocks in two situations. First, when the return from stocks in the sector has a narrow dispersion around the mean, an ETF might be the best choice. Second, if you are unable to gain an advantage through knowledge of the company, an ETF is your best choice.
Because of their wide array of holdings, ETFs provide the benefits of diversification, including lower risk and less volatility, which often makes a fund safer to own than an individual stock. An ETF's return depends on what it's invested in. An ETF's return is the weighted average of all its holdings.
Key Points. Warren Buffett made his fortune by investing in individual companies with great long-term advantages. But his top recommendation for anyone is to buy a simple index fund. Buffett's recommendation underscores the importance of diversification.
“One bequest provides that cash will be delivered to a trustee for my wife's benefit,” he wrote. “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 recommended using Vanguard's S&P 500 index fund.
In 2020, Buffett said that “for most people, the best thing to do is to own the S&P 500 index fund, adding “People will try to sell you other things because there's more money in it for them if they do.” This no-frills investment strategy is one of the best for ensuring long-term, low-cost gains.
Berkshire Hathaway stock held strong in 2022, making a slight gain compared to a loss of more than 19% for the S&P 500. But it lagged in 2023 rising about 16% compared to the S&P 500's gain of 24%. So far this year it is up around 16%. All-around performance is strong, but not quite ideal, for Berkshire Hathaway stock.
ETFs have several advantages for investors considering this vehicle. The 4 most prominent advantages are trading flexibility, portfolio diversification and risk management, lower costs versus like mutual funds, and potential tax benefits.
If you're interested in investing in an ETF and have $1,000 that you can spare to invest -- meaning you already have an emergency fund saved and have paid down any high-interest debt -- the Vanguard S&P 500 ETF (NYSEMKT: VOO) is a great option.
For instance, some ETFs may come with fees, others might stray from the value of the underlying asset, ETFs are not always optimized for taxes, and of course — like any investment — ETFs also come with risk.
When it comes to stocks vs. ETFs, one is not better than the other. They are both solid ways to invest your money depending on your interest and goals. In fact, you can do both to further diversify your portfolio.
ETFs are considered to be low-risk investments because they are low-cost and hold a basket of stocks or other securities, increasing diversification. For most individual investors, ETFs represent an ideal type of asset with which to build a diversified portfolio.
One of the biggest reasons Ramsey cautions investors about ETFs is that they are so easy to move in and out of. Unlike traditional mutual funds, which can only be bought or sold once per day, you can buy or sell an ETF on the open market just like an individual stock at any time the market is open.
Billionaires don't just buy individual stocks. ETFs can have excellent wealth-building potential over time, as well. Billionaire investors like Warren Buffett and others are often known for their stock-picking abilities, and for good reason.
ETFs can be a great investment for long-term investors and those with shorter-term time horizons. They can be especially valuable to beginning investors. That's because they won't require the time, effort, and experience needed to research individual stocks.
ETFs are subject to market fluctuation and the risks of their underlying investments. ETFs are subject to management fees and other expenses. Unlike mutual funds, ETF shares are bought and sold at market price, which may be higher or lower than their NAV, and are not individually redeemed from the fund.
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