"The S&P 500 index is the one to use... You're buying America," Warren Buffett (Trades, Portfolio) once said in an interview, encapsulating his philosophy on index fund investing.
As two of the most successful and influential investors of the modern era, Buffett and Jack Bogle's paths crossed infrequently over the decades. However, the "Oracle of Omaha" and the "Father of Indexing" formed an alliance around low-cost index funds, particularly the S&P 500, as an optimal investment strategy for most.
Principles of Index Fund Investing
Their remarkably simple yet profoundly effective principles have stood the test of time. In his customary folksy language, Buffett succinctly summarized the case: "The best thing you could have done is just buy an index fund and never look at a headline again." Meanwhile, Bogle coined the mantra: "Don't look for the needle in the haystack. Just buy the haystack!"
This plain-spoken wisdom has resonated deeply with a generation of investors seeking sensible guidance to build wealth slowly but surely.
Buffett's Belief in Index Funds
The bedrock of Buffett's investment framework is recognizing what you can and cannot know. In a world of boundless unknowns, index funds focus on the knowable, namely that American business will progress over the long run.
Rather than wager on futile market timing or stock-picking, the guru believes most investors are better off buying the entire haystack at low cost. As a proponent of rational temperament prevailing over irrational activity, his philosophy rejects playing a game few can win.
Buffett's Conviction in Practice
For decades, this conviction has surfaced in Buffett’s writings, interviews and comments. He practiced what he preached by betting $1 million against an elite hedge fund that the S&P 500 would outperform its hyperactive trading and exorbitant fees over 10 years. Buffett won handily.
For his wife’s inheritance, he mandated a 90/10 split between an S&P 500 index and short-term Treasuries. This exemplified his belief in indexing’s humility and eliminated any notion that the estate’s stewards could prove smarter by hand-picking alternatives.
Buffett on Low Expenses
Buffett also extols low expenses compounding over time. He uses folksy metaphors to show that for investors overall, beating the market is mathematically impossible. It is like passing around a bucket of water expecting the level to rise. Costs weigh down returns.
Bogle's Gospel of Low-Cost Indexing
Before index funds were mainstream, Bogle launched the first index mutual fund in 1975 after recognizing the futility of expensive active funds reliably beating the market. For years, his pioneering work was mocked and maligned.
Slowly but surely, his central idea gained acceptance as common sense prevailed. The evidence proved conclusively that index funds matched market returns while charging significantly lower fees. Investors migrated toward Vanguard and indexing.
Bogle's Philosophy and the Snowball Effect
At its core, Bogle’s philosophy firmly stands on the precept that investing is no place for rampant speculation. Index funds sensibly captured market returns at minimal cost and tax burden – a game investors could win.
He likened investing to a snowball effect, with regular contributions compounding over time. By reinvesting automatically and minimizing unnecessary transactions, index fund investors accelerate this wealth-building cycle.
Initially scorned but ultimately vindicated, Bogle earned status as an investing sage. His life’s work implored embracing “the majesty of simplicity” that the numbers empirically proved.
The Case for S&P 500 Index Funds
Given their many shared convictions around prudent investing, it is unsurprising that both Buffett and Bogle pointed toward the S&P 500 as an ideal index for most investors to focus on building their snowball.
As pioneers in distilling complex investing problems into fundamental truths, the two luminaries converged on S&P 500 index funds as a straightforward way to capture the wealth-creating power of American business.
Benefits of S&P 500 Index Funds
The S&P 500 Index represents over 80% of the total value of the U.S. stock markets. It covers 500 of the largest publicly-traded American companies, including Apple Inc (AAPL, Financial), Microsoft Corp (MSFT, Financial), Amazon.com Inc (AMZN, Financial) and Berkshire Hathaway Inc (BRK.A, Financial) itself.
Owning the S&P 500 offers instant diversification across major industries, including technology, health care, financials, consumer goods, industrials and more. By buying the haystack, investors benefit from broad exposure rather than betting on individual needles.
Historical Performance of S&P 500
Over the past 90-plus years, the S&P 500 has delivered average annualized returns of around 10% before inflation. While the index has periodically undergone severe declines, its long-term trajectory has always been upward as the economy expands.
Investors who stay the course are rewarded. By owning the S&P 500 through an index fund, investors profit from America's dynamism without needing to outsmart highly paid professionals.
Cost Efficiency of S&P 500 Index Funds
Even better, indexed S&P 500 funds carry minimal expenses. Vanguard S&P 500 ETF (VOO, Financial) charges just 0.03% annually, while the S&P 500 ETF TRUST ETF (SPY, Financial) costs 0.09%. Contrast that to over 1% for actively managed mutual funds. Lower fees mean higher returns compounding as the snowball grows.
Discover the Keys to Successful Index Fund Investing
Buffett and Bogle's proven investment wisdom reveals several keys to success. First, start early and be consistent. Give compounding more time to work its magic by investing early and regularly. Small amounts contribute to the snowball's formation. Make routine, fixed contributions over years and decades.
Second, reinvest all gains. Reinvesting automatically keeps directing dividends, interest and other earnings into additional shares. This cycling back of income perpetuates compounding.
Third, stay patient in down markets. Don't panic and sell during temporary declines. Rather, have faith, based on history, that markets rebound and new heights are reached if you ride out storms.
Fourth, resist market timing. Simply stay invested through the ups and downs. You cannot predict future returns, so constant dollar-cost averaging is prudent. Sell rarely, if ever.
Fifth, minimize expenses as every percentage point lost to fees impairs returns. Prioritize minimal-cost broad index funds like the S&P 500. Avoid high-fee, actively managed funds playing zero-sum games.
Finally, remain disciplined. Block out the noise from media pundits and peers. Stick to your plan through bull and bear cycles. Do not chase fads or deviate from time-tested wisdom.
Let the Haystack Work Its Magic for You
In their storied careers, Buffett and Bogle repeatedly returned to simple truths: for most investors, low-cost S&P 500 index funds provide the surest path to wealth accumulation.
Rather than speculating, adopt the gurus' sensible strategy. Stay the course in all markets. Reject hype in favor of common sense. Harness the snowball effect by reinvesting index fund gains over your lifetime.
S&P 500 index funds deliver positive expected returns at minimal cost and effort. So embrace the majesty of simplicity and let the haystack work for you.
