Picking the right investments is critical to a successful portfolio, but it can also be overwhelming at times. When there are countless options to choose from, it can be tough to differentiate the good investments from the bad.
Famed investor Warren Buffett knows a thing or two about picking stocks, and there’s one investment he believes is the best fit for many portfolios: The S&P 500 index fund. Here’s why it may be a smart idea to stock up right now.
Why invest in an S&P 500 index fund?
When you invest in an S&P 500 index fund, you’re investing in all of the companies that make up the S&P 500 index itself. This index includes the biggest and strongest organizations in the U.S., such as Amazon, Apple, Microsoft, and Tesla.
Because all of these stocks are bundled together into a single investment, you don’t need to worry about choosing individual stocks or deciding when to buy or sell. All you have to do is invest in a single fund, then sit back and wait for your money to grow.
In my view, for most people, the best thing to do is to own the S&P 500 index fund. — Warren Buffett
Not only does this approach take far less effort than hand-picking stocks, but it could also help your money grow more over time. In fact, Warren Buffett once famously bet $1 million that an S&P 500 index fund would outperform a group of actively managed hedge funds. The index fund beat the hedge funds over 10 years, proving that it is possible to make a lot of money with this type of investment.
S&P 500 index funds can also help protect your money against market downturns. While all investments are subject to volatility and can experience losses in the short term, the S&P 500 has a decades-long history of recovering from even the worst crashes. If the market does take a turn for the worse, it’s highly likely an S&P 500 index fund will recover eventually.
Is this investment right for you?
S&P 500 index funds can be a fantastic investment for many people, but they’re not right for everyone.
If you prefer a more hands-on approach to investing, for example, you may be better off buying individual stocks. When you buy an index fund, you have no choice but to invest in all of the stocks within the fund. If there are certain companies you’d rather not own or if you simply want more control over your portfolio, an index fund may not be the best option.
Also, although index funds do have a history of outperforming actively managed funds, they still can’t beat the market. This investment aims to mirror the performance of the market as a whole, making it impossible for it to earn higher-than-average returns.
That isn’t necessarily a bad thing, because average returns can still add up over time. But if you prefer choosing individual stocks that can potentially beat the market, an S&P 500 index fund may fall short.
The investments you choose could potentially make or break your strategy, and S&P 500 index funds are a smart bet for many investors. While they aren’t perfect and do have their downsides, they could be a fantastic addition to your portfolio.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.