Warren Buffett has spent decades picking individual companies, yet his advice for everyday investors remains surprisingly simple. The former Berkshire Hathaway CEO has repeatedly backed low-cost S&P 500 index funds as a straightforward way to build wealth over time. History has supported that view so far, although today’s unusually high market valuation raises questions about what comes next.
Buffett keeps it simple
Back in 1993, Buffett wrote that investors who regularly put money into an index fund could outperform most investment professionals. He later proved his point with a famous 2008 bet that a low-cost S&P 500 fund would beat five hedge funds-of-funds over 10 years, a wager he ultimately won.
His confidence goes beyond public advice. In Berkshire Hathaway’s 2013 shareholder letter, Buffett instructed that 90% of his wife’s inheritance be placed in an S&P 500 index fund, with Vanguard as his preferred choice.
One option is the Vanguard S&P 500 ETF, which carries an expense ratio of just 0.03%. Since the index took its current form in 1957, the S&P 500 has delivered an average annualised total return of roughly 10%. Performance has been even stronger recently, producing a 315% total return since late August 2016 through August 25, 2026.
Valuations flash a warning
Past performance, however, does not guarantee Buffett’s strategy will deliver similar results over the next decade. The S&P 500’s CAPE ratio currently stands at 41.8, placing valuations at historically elevated levels.
Historically, periods beginning with a CAPE ratio above 40 have been followed by negative annualised S&P 500 returns over the subsequent decade. Concentration presents another consideration, with information technology representing almost 37% of the Vanguard ETF and financials accounting for 12.5%.
Technology companies may partly justify richer valuations through strong profits, global customer bases and substantial growth potential. Still, Buffett’s decades-old strategy now faces a market priced far differently from much of its history.
