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Why Warren Buffett advocates people invest in the S&P 500

Warren Buffett is one of the world’s very best investors, if not the best. Yet, despite benefiting from the power of choosing which shares to invest in, he advocates most people put their money into a low cost index fund like the S&P 500.

The problem is that a lot of investors don’t have the psychology to handle investing for the long-term. We are wired to avoid danger and trouble, leading to fear of the share market. As many readers know, risk is not quite the same thing as volatility.

When people see shares doing well they get excited and buy in, then sell when things turn rough. That results in buying high and selling low – leading to the destruction of wealth.

It also requires a particular skillset to evaluate a business and decide if it’s an opportunity or not.

Investing regularly and methodically, rain or shine, in an index fund like the S&P 500 takes out a lot of the guesswork. If you simply buy and hold forever then you don’t even need to worry about boom and bust cycles. Low-cost index funds remove the return-hurting investment fees, which can be up to 2% per annum plus performance fees in the US. In Australia most managers charge at least 1%.

To get a piece of the S&P 500 on the ASX you could go for iShares S&P 500 ETF (ASX: IVV), an exchange-traded fund provided by Blackrock which has an extremely low management fee of 0.04% per annum.

It has high-quality holdings as its biggest positions including Apple, Microsoft, Amazon, Berkshire Hathaway and Facebook. These businesses are likely to be winners long into the future.

Foolish takeaway

The S&P 500 evolves over the years to include the best newer businesses as well as the older stalwarts. Over the past five years its return has been an average of 19.33% per annum. I’d certainly rather hold this ETF compared to an ASX-focused index investment like Vanguard Australian Share ETF (ASX: VAS) due to the quality and global nature of the holdings, as attractive as franking credits are in the short-term.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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