Warren Buffett, the “Oracle of Omaha,” was born in 1930 and has spent decades establishing himself as one of the great minds in investing. While he reportedly loves Coca-Cola, and has invested heavily in the company, there’s another investment Buffett says every investor should own — the S&P 500 (SNPINDEX: ^GSPC).
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The S&P 500 tracks about 500 of the largest U.S. companies, including Nvidia and Broadcom. Rather than choosing individual stocks, crossing your fingers, and hoping you’re right, the S&P 500 allows you to spread your risk by investing in many different companies. The cherry on top is that it leaves you with more money to invest each year.
While you can’t buy shares of the S&P 500 directly because it’s a measuring tool, you can invest in the index fund through exchange-traded funds (ETFs) like the SPDR S&P 500 ETF (NYSEMKT: SPY) or the Vanguard S&P 500 ETF (NYSEMKT: VOO).
Buffett’s approach may not be sexy or exciting enough for some investors, but it’s a proven winner long term. Over the last 50 years, the average annual return of the S&P 500 has been 11.992%, assuming dividends are reinvested and excluding inflation.
Here are some of the advantages of the S&P 500 and reasons Buffett’s advice may make sense for you:
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An eye on large-cap American businesses: The S&P 500 tracks the performance of the 500 largest publicly traded U.S. companies. To give you a sense of how successful these corporations are, a company must have an unadjusted market capitalization of $22.7 billion or more to be added to the S&P 500 index.
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Importance of public float: Companies must have adequate liquidity and public float. Public float refers to the shares of a publicly traded company available to the public, rather than the number of shares held by insiders.
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Only successful companies are included: Companies must have positive earnings in the most recent quarter and over the past four combined quarters.
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Measures sectors across the board: The S&P 500 covers all major sectors, including industrial, consumer discretionary, financials, healthcare, technology, and more. In other words, investing in the S&P 500 through an ETF or mutual fund means creating a more diversified portfolio.
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Reduces your risk: By holding different sectors, you reduce the risk that one poorly performing sector can sink your entire portfolio. Even if one or two sectors sink for a while (and it could happen), you’ll have other sectors to hold the portfolio above water.