Berkshire Hathaway (BRK.A 0.36%) (BRK.B 0.21%) hosts its annual shareholder meeting each spring, drawing tens of thousands of investors to Omaha, Nebraska. People come from around the globe to hear CEO Warren Buffett and Vice Chairman Charlie Munger discuss everything from Berkshire's business to the broader economy.
In 2021, the pandemic made an in-person meeting impossible, so the five-hour event became a virtual affair. As always, Buffett imparted several pearls of financial wisdom to his fans. The conversation topics ranged from cryptocurrencies like Bitcoin to tech companies like Apple and Microsoft. But the most interesting tidbit to come out of the meeting may have been Buffett's estate plans.
Image source: The Motley Fool.
Investing advice from Buffett
During the meeting, one shareholder asked Buffett to comment on the fact that Berkshire stock had, on average, underperformed the broader market for the past 15 years. Buffett responded by saying he never recommends Berkshire stock to anybody. Instead, he reiterated his long-held belief that an S&P 500 index fund was a better path to wealth for the average person.
In fact, Buffett plans to take his own advice. The so-called Oracle of Omaha said, "On my death, there's a fund for my then-widow, and 90% will go into an S&P 500 index fund." That's right. Not Berkshire stock. Not Apple stock. After the vast majority of his fortune is given away to various philanthropies, 90% of Buffett's remaining wealth will be invested in a simple S&P 500 index fund.
The reason behind his conviction is simple. Buffett does not believe the average person -- meaning someone who doesn't follow the market that closely -- can pick stocks. But an S&P 500 index fund, such as the Vanguard S&P 500 ETF, offers instant diversification across all 11 market sectors and 500 of the largest U.S. companies. That eliminates the risk that comes with buying individual stocks, and it virtually guarantees profits over a long enough holding period.
The chart below shows why a long-term mindset is critical. The longer the holding period, the greater the probability of a positive return in the S&P 500.
|
Holding Period |
Probability of Positive Return |
|---|---|
|
1 Month |
63% |
|
1 Year |
75% |
|
5 Years |
88% |
|
10 Years |
94% |
|
20 Years |
100% |
Data source: Fisher Investments.
A foolproof path to life-changing wealth
Buffett's advice is particularly relevant today. In June, the S&P 500 dropped into bear market territory (meaning the index had fallen at least 20% from its recent high) for the seventh time in the last five decades. Losses of that magnitude can be nerve-racking even for experienced investors. But there is a silver lining. Regardless of cause or severity, the market has rebounded from every past downturn. That makes the current downturn a particularly good time to put money into an S&P 500 index fund.
Over the last three decades, the S&P 500 has generated a total return of roughly 9.9% per year, and those gains are in spite of significant sell-offs that took place during the dot-com bubble and the Great Recession. When you sell your stock during that time can make a difference in what level of return you will come away with, but it's generally going to be a positive one. For context, if you had invested $115 weekly during that time period, your portfolio would be worth just over $1 million today.
Does that mean you shouldn't buy individual stocks? I don't think so. If you do the legwork -- thoroughly researching any business before you invest -- owning individual stocks can translate into a market-beating portfolio. But for many investors, it makes sense to allocate at least a portion of your wealth to an S&P 500 index fund.
