Why Warren Buffett Tells Everyday Investors to Buy Index Funds

It sounds like a contradiction: a man who built one of history's great fortunes picking individual businesses spends his shareholder letters telling almost everyone else not to. It isn't a contradiction once you understand what he's actually saying — most people don't have the time, temperament, or information edge to out-research professional analysts, and trying anyway usually just means paying high fees for underperformance. So instead of guessing, he tells most investors to buy the whole market, cheaply, and leave it alone.

He didn't just say this. He put a million dollars behind it.

The $1 Million Bet

In 2007, Buffett publicly offered to bet that a plain S&P 500 index fund would beat a hand-picked basket of hedge funds over the following decade, after fees. A hedge fund manager named Ted Seides, of Protégé Partners, took him up on it. The wager ran from January 1, 2008 — right into the financial crisis — through the end of 2017.

Buffett put his side of the bet into a low-cost Vanguard S&P 500 index fund. Seides picked five funds-of-hedge-funds, chosen by a professional who spent his career doing exactly that kind of selection for a living.

The index fund returned about 7.1% a year over the decade. The hand-picked hedge funds returned about 2.2% a year, after their fees. Seides conceded before the bet officially ended. The million-dollar payout went to charity — Girls Inc. of Omaha.

Why Fees Are the Silent Killer

The hedge funds in Buffett's bet weren't run by bad investors. Several of the underlying funds actually made reasonable returns before fees. The problem was layers of fees stacked on top of layers of fees, quietly eating a large share of the profit before it ever reached the investor. This is the same mechanism that drags down actively managed mutual funds sold to everyday investors — the fee itself, compounded over decades, often matters more than which fund you picked.

Here's what a fee difference does to the exact same $10,000, growing at the same 7% before fees, over 30 years:

Same starting amount, same market return, same 30 years. The only difference is the fee — and it works out to roughly $31,000, or about 42% of the low-cost fund's ending value, quietly given away. Nobody sends you a bill for this. It just never shows up in your account. You can run your own numbers with our investment fee calculator, and see the term explained in the glossary entry on MER.

What "Buying the Index" Looks Like in Canada

The Vanguard fund Buffett used in his bet isn't available to Canadian investors directly, but the Canadian-listed equivalent does the same job: a fund like VFV holds all 500 companies in the S&P 500 for a 0.09% annual fee, meaning you keep essentially all of the market's return instead of handing a chunk of it to a fund manager. We go through exactly how it works, and where to hold it for the best tax treatment, in VFV explained.

It's worth noting Buffett isn't just recommending this for strangers — the instructions he's left for his own family's trust direct the large majority of it into a low-cost S&P 500 index fund. If it's good enough for his own estate, it's a reasonable place for most people to start.

The Takeaway If You're Starting With $100

You don't need to beat the market to do well by most people's standards — you need to not lose to fees, and stay invested long enough for compounding to do its work. That's a much lower bar than "pick better stocks than professional hedge fund managers," and it's one that's realistically available to anyone with a brokerage account and a bit of patience. Our beginner's guide to investing walks through the practical steps, and the savings rate calculator shows how contribution size and time interact.

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