Warren Buffett says most people shouldn't pick stocks. Here's how he wants his family to invest his wealth

For decades legendary investor Warren Buffett has advised people not to attempt to outperform the stock market, suggesting that most people should instead invest in a low-cost S&P 500 index fund rather than trying to select winning stocks or forecast market movements. The retired chairman and CEO of Berkshire Hathaway has for a long time maintained that average investors do not require complicated strategies if they want to build up their wealth over time.

As he explained in his 2017 letter to shareholders, Buffett's usual recommendation was to invest in a low-cost S&P 500 index fund. "My regular recommendation has been a low-cost S&P 500 index fund," Buffett wrote in his 2017 letter to shareholders.

This advice has kept drawing attention since the S&P 500—an index which tracks 500 of the largest publicly traded US companies—has hit new highs. On Tuesday the benchmark reached a record high of 7,819 points and has increased by 14% this year, by nearly 80% over the last five years and by almost 1,100% since it had dropped below 700 during the 2008 financial crisis.


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Why Buffett recommends index funds

Most people should avoid attempting to predict which stocks will do the best, when to buy or sell shares, or how to time the market, says Warren Buffett.

An inexpensive index fund provides a simpler method since it follows a broad market index and thus enables investors to share in the performance of a number of companies without having to pick individual stocks.

Buffett has also cautions that high investment fees can have a detrimental effect on returns over time, stating that investors frequently pay money managers for strategies which do not actually lead to better results. Speaking to author Tim Ferriss at Berkshire Hathaway's annual shareholder meeting in 2008, Buffett said his approach allows people to invest and then "forget it and go back to work."

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"You will not get that advice from anybody because nobody gets paid to give you that advice," Buffett said. "You will have all kinds of people telling you how much better they can do for you than that, and how if you just give them a wrap fee, or give them commissions, or whatever it may be, that they will do better — but they won't do better."

At the annual shareholder meeting of Berkshire Hathaway in 2008, Buffett told author Tim Ferriss that his method enables people to invest and then "forget about it and go back to work."

No one will give you that advice since no one is paid to provide it, Buffett said. There will be all sorts of people saying that they can do a better job for you than that and that if you just pay them a fee or give them commissions or something of that sort they will perform better—though they won't.

What Buffett wants his family to do with his wealth

Buffett has also advised a trustee who will be in charge of the wealth he leaves his wife after his death to follow a similar investment strategy. The instructions are simple: "Place 10 per cent of the cash in short-term government bonds and 90 per cent in a very low-cost S&P 500 index fund."

He set out the reasons for his actions in the letter he wrote to his shareholders. He stated that the trust's long-term results as a result of this policy would be better than those obtained by most investors—whether they were pension funds, institutions, or individuals—who use high-fee managers.

The strategy is based on the idea that investors will be able to benefit from the long-term growth of the stock market without having to buy and sell shares all the time or pay substantial management fees.

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Why Buffett believes in America's future

His investment advice is also based on his belief in the long-term outlook for the US economy. When the financial crisis of 2008 occurred, he wrote an article expressing the view that 'Buy American. I am.' He maintained that investors should not lose faith in the country due to short-term economic problems. As time goes on the news about the stock market will be positive, Buffett wrote.

He also mentioned the difficulties that America had experienced in the 20th century, saying that "during the 20th century the United States went through two world wars and other serious and costly military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president," before adding that "the Dow had risen from 66 to 11,497."