Warren Buffett is the greatest stock picker to ever live. He’s built a mountain of wealth—hundreds of billions—by hand-selecting companies like Coca-Cola and American Express.
So, why does he keep telling you not to do what he does?
It’s the ultimate irony of the investing world. The man who made "value investing" a household term spends his annual letters begging the average person to stop trying to find the next big winner. Instead, he points toward something much more boring.
He wants you to buy the haystack, not the needle.
Basically, the Warren Buffett index funds strategy is built on a humble admission: most people don't have the time, the stomach, or the data to beat the market. Honestly, even most professionals can't do it.
The Famous 90/10 Rule for His Own Family
You've probably heard about the instructions in his will. If not, it's a bit of a shocker. Buffett has stated that for the trust benefiting his wife after he passes, the advice to the trustee is dead simple.
He wants 10% in short-term government bonds and 90% in a very low-cost S&P 500 index fund.
Think about that for a second. The guy who runs Berkshire Hathaway—a massive conglomerate—isn't telling his heirs to put every penny into Berkshire stock. He’s not telling them to hire a fancy hedge fund manager with a corner office in Manhattan.
"I suggest Vanguard’s," he wrote in his 2013 letter, referring specifically to their S&P 500 fund.
Why Vanguard? Because fees are the silent killer of wealth. If you're paying 1% or 2% in management fees every year, you're essentially handing over a massive chunk of your future compounding to someone else's yacht fund.
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Buffett loves the S&P 500 because it’s a bet on American ingenuity. You’re buying the 500 largest, most profitable companies in the U.S. As they grow, you grow. No guesswork required.
The Million-Dollar Bet That Changed Everything
In 2008, Buffett put his money where his mouth was. He challenged the entire hedge fund industry to a wager.
The terms were straightforward: Buffett bet $1 million that a simple S&P 500 index fund would outperform a hand-picked portfolio of five "funds of hedge funds" over a ten-year period.
Protege Partners LLC took the bet. They picked the absolute elite—managers who get paid millions to find "alpha" and hedge against losses.
By the time 2017 rolled around, it wasn't even close.
The index fund returned about 7.1% compounded annually. The hedge funds? They averaged around 2.2%.
The "experts" got crushed by a computer-managed list of stocks that anyone can buy for the price of a sandwich.
Why the Pros Usually Lose
- Fees, fees, and more fees: Hedge funds often charge "2 and 20"—2% of total assets and 20% of profits.
- Over-trading: Every time a manager buys or sells, they trigger taxes and transaction costs.
- Human Ego: Managers feel they must do something to justify their paycheck, even when doing nothing is the better move.
Is the S&P 500 Still the Gold Standard in 2026?
Lately, some people are getting nervous. They see the S&P 500 becoming increasingly "top-heavy" with tech giants like Nvidia, Apple, and Microsoft.
There's a valid worry here. If a couple of these tech titans stumble, the whole index takes a hit.
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But Buffett’s logic hasn't really shifted. He’s always viewed the S&P 500 as a self-cleansing mechanism. If a company fails or shrinks, it gets kicked out of the index. If a new, revolutionary company rises, it gets added.
It's a Darwinian system for your money.
Beyond the S&P 500: What About Berkshire Itself?
Here is where it gets kinda meta.
People often ask: "If index funds are so great, why should I buy Berkshire Hathaway (BRK.B)?"
Buffett himself has addressed this. For the "know-nothing" investor (his words, not mine), the index fund is better. But Berkshire is basically a collection of incredible businesses managed by people who are obsessed with capital allocation.
Berkshire actually holds some S&P 500 ETFs in its own portfolio—specifically the Vanguard S&P 500 ETF (VOO) and the SPDR S&P 500 ETF Trust (SPY).
It’s like a chef who owns a five-star restaurant but still keeps a box of high-quality pasta in the pantry. Sometimes, the simplest option is the most reliable.
Real Talk: The Risks Nobody Mentions
I’m not going to sit here and tell you index funds are magic. They aren't.
If the market drops 30%, your index fund drops 30%. There’s no manager there to "soften the blow" or move you to cash. You have to be okay with seeing red on your screen.
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Retirees often struggle with the 90/10 split Buffett recommends. If you’re 75 years old and the market crashes, you might not have ten years to wait for it to bounce back. Buffett can recommend 90% stocks because his family is already incredibly wealthy—they can afford a dip.
For the rest of us, that 10% bond cushion might need to be a bit bigger, depending on how close you are to needing the cash.
How to Actually Start
If you want to follow the "Oracle's" path, you don't need a broker or a fancy suit.
- Pick your platform: Use a low-cost brokerage like Vanguard, Fidelity, or Schwab.
- Find the ticker: Look for VOO (Vanguard), SPY (State Street), or IVV (iShares). These all track the S&P 500.
- Check the Expense Ratio: This is the fee. It should be tiny. For VOO, it's usually around 0.03%. If you’re paying more than 0.10% for an S&P 500 fund, you’re getting ripped off.
- Automate it: Set up a recurring buy. $50, $500, or $5,000—it doesn't matter. Just keep buying through the highs and the lows.
Actionable Steps for Your Portfolio
Stop searching for the "next Nvidia." It's exhausting and usually ends in tears.
Instead, look at your current holdings. Are you paying an advisor 1% to "manage" your money? Ask them if they’ve beaten the S&P 500 over the last five years net of their fees.
The answer is almost certainly no.
Transitioning toward Warren Buffett index funds doesn't have to happen overnight. You can start by putting your next contribution into an S&P 500 fund and watching how it performs compared to your "picked" stocks.
Most people find that the less they touch their portfolio, the faster it grows. It's a hard lesson to learn because we're taught that hard work equals better results. In the stock market, "hard work" often just means more mistakes.
Be the tortoise. Buy the index. Go live your life while the 500 biggest companies in the world do the heavy lifting for you.