Warren Buffett, one of the world's most successful investors, has long advised the average investor to follow a simple investment strategy: invest in a low-cost S&P 500 index fund and hold it for the long term. Contrary to the idea that Buffett invested in individual stocks, he feels that most retail investors are better served by passive investing rather than trying to outperform the market.
His insights have become relevant again as exchange-traded funds (ETFs) continue to attract record inflows from investors seeking diversified, low-cost exposure to the US stock market.
Most investors don't need to do the research themselves on a company or try to outperform the professional managers of their chosen investing vehicles, Buffett has said many times. Rather, he suggests purchasing a low-cost S&P 500 index fund, which is a collection of 500 of the biggest publicly traded companies in the US.
In a statement made during Berkshire Hathaway's annual meeting on Tuesday, Buffett stated, "For most people, the best thing to do is to own the S&P 500 index fund."
His confidence in passive investing is backed by experience. In 2008, Buffett famously bet $1 million that an S&P 500 index fund would beat a portfolio of five hedge funds over 10 years. The findings strongly supported the index approach, giving the S&P 500 about 126% returns while the actively managed hedge funds had about 36% returns.
One of Buffett's many mentioned funds is the Vanguard S&P 500 ETF (VOO). The expense ratio of the fund is a mere 0.03%, which is one of the lowest expense ratios among the most cost-effective investment vehicles available.
Over the last 10 years, VOO has generated a total return of about 303% (as of late July 2026) from holding the stock.
The ETF also provides immediate diversification as it invests in different sectors like technology, healthcare, financial services, consumer goods, energy, and industrial companies, thus reducing the risk of owning a few stocks.
Buffett's fundamental rule for investing is letting compound returns run. The average return of the S&P 500 has been around 10% annually over long time periods, but returns each year can fluctuate.
Disciplined investing and reinvestment of funds in an S&P 500 ETF can see this investment exceed $1 million after 40 years, if a historical average return is used as the basis for the investment.
Market analysts also cite research that indicates the S&P 500 had positive total returns over the last 20 years in every rolling period since 1919, which is another reminder of the positive benefits of staying invested through the ups and downs of the market.
Also Read: How to Become Rich Through Stock Market Investing (Warren Buffett Strategy)
Despite decades of beating the market, Buffett admits it's very hard to consistently do so. Many studies have demonstrated that most actively managed funds (after expenses) underperform the S&P 500 over a long period of time.
It's for this reason Buffett has made it public that he would invest 90% of his wife's cash inheritance into a low-cost S&P 500 index fund and the other 10% into short-term government securities.
The principles Buffett continues to follow in his investment advice remain the same: value low, diversify, invest regularly, and hold for the long term. Most people who invest in stocks will find that a low-cost S&P 500 ETF is a simple and lasting method for building wealth; for more advanced investors, investing in individual stocks can yield outstanding returns. However, as markets keep changing, Buffett's passive investing mantra continues to be one of the most straightforward and effective ways to establish financial security for the future.
Buffett believes most investors cannot consistently outperform the market. A low-cost S&P 500 index fund provides broad diversification, low fees, and long-term exposure to America's largest companies.
Buffett has frequently highlighted the Vanguard S&P 500 ETF (VOO) because of its extremely low expense ratio, broad market exposure, and strong long-term performance.
Yes. S&P 500 ETFs are considered one of the simplest investment options for beginners as they offer instant diversification, passive management, and historically strong long-term returns.
The biggest benefit is long-term wealth creation through diversification and compound growth while avoiding the need to research or actively manage individual stocks.
No. Like all equity investments, S&P 500 ETFs can decline in value over shorter periods. However, history shows they have delivered strong returns over long investment horizons, making them popular among long-term investors.