What does Warren Buffett say about index funds? — Practical steps to start

Quick answer: What Warren Buffett said about index funds

Warren Buffett advised that trustees place most trust assets into a low-cost S&P 500 index fund, offering a simple default allocation to capture broad US large-cap exposure; he framed this as an easy, low-cost choice for nonprofessional trustees rather than a personalized investment prescription 2013 Berkshire Hathaway shareholder letter.

The example allocation Buffett used for the trust was 90 percent equities and 10 percent short-term bonds, given as a practical starting point for hands-off investors and their trustees 2013 Berkshire Hathaway shareholder letter.

Buffett has reiterated the same broad idea in later public comments and shareholder Q&A, presenting indexing as a low-cost, long-term approach that many individual investors can reasonably consider Berkshire Hathaway public statements. Morningstar coverage

Definition and context: how to start an index fund

The phrase how to start an index fund here means how an individual can begin investing in a low-cost index fund as part of a simple portfolio. An index fund is a pooled investment vehicle that aims to track the performance of a market benchmark rather than to beat it.

Index funds come in two common structures: mutual funds and ETFs. Both can track the same benchmark, but ETFs often trade like a stock while index mutual funds transact at end-of-day net asset value.

Key terms to know are benchmark, expense ratio, tracking error, and tax efficiency. A benchmark is the index the fund aims to mirror. The expense ratio is the annual fee investors pay and is central to long-term outcomes. Tracking error shows how closely the fund follows its benchmark, and tax efficiency reflects how much taxable activity the fund generates, which matters in taxable accounts Vanguard research on indexing and costs.

Account choice also matters: tax-advantaged accounts like IRAs and 401(k)s change the after-tax impact of dividends and capital gains, while taxable accounts can benefit more from tax-efficient funds. Consider account type when you plan contributions and where to hold each fund.

Buffett’s endorsement and the evidence behind it

Buffett’s practical recommendation for trustees emphasized simplicity, wide diversification, and low costs. He argued that a low-cost S&P 500 index fund would serve many nonprofessional investors better than trying to pick active managers for long-term wealth accumulation 2013 Berkshire Hathaway shareholder letter. Investopedia coverage

Does Buffett’s trustee advice fit my situation?

Independent industry studies show why costs matter. Scorecards comparing active managers with their benchmarks find that a majority of active large-cap US equity funds underperform net of fees over multi-year horizons, reinforcing the logic that lower fees and lower turnover tend to help long-term results SPIVA U.S. Scorecard. Further coverage

Academic and practitioner reviews also point to fees, turnover, and tax treatment as primary drivers of the typical indexing edge. That body of work does not promise indexing always wins, but it supports a fee-focused, buy-and-hold approach for many investors Journal of Portfolio Management review.

How to start an index fund – practical step by step

Step 1: Pick a benchmark and decide structure. Choose whether you want exposure to US large-cap (for example the S&P 500) or broader coverage using a total market index. Then pick whether you prefer an ETF or an index mutual fund based on trading needs and the accounts you use.

Step 2: Compare fees and tracking. Look up the expense ratio and examine how the fund tracks its benchmark. Lower expense ratios and tight tracking generally reduce long-term drag on returns, which is central to Buffett-style advice Vanguard research on indexing and costs.

Step 3: Check tax treatment and account placement. Decide whether the fund belongs in a taxable account or a tax-advantaged account like an IRA or 401(k). Tax-inefficient funds are often better held in tax-advantaged accounts to reduce taxable events.

Step 4: Set an allocation and automate. Choose an equity-bond split that reflects your time horizon and risk tolerance, then automate contributions. Automatic investing reduces timing risk and the temptation to trade frequently.

Step 5: Rebalance and minimize turnover. Use a calendar rule or a threshold rule to rebalance back to your target mix. Lower portfolio turnover helps preserve tax efficiency and keeps trading costs modest over decades SPIVA U.S. Scorecard.

Choosing S&P 500 vs total market and international exposure

Buffett singled out the S&P 500 as a simple default for trustees because it offers straightforward exposure to large US companies and is simple to implement; that made it an easy recommendation for nonprofessional fiduciaries 2013 Berkshire Hathaway shareholder letter.

Choosing S&P 500 versus a total US market fund or adding international exposure depends on decision factors like diversification goals, tax implications, and personal preferences. Total market funds add small- and mid-cap exposure, while international funds broaden geographic diversification and currency exposure.

Tax efficiency can change the calculus. For example, foreign funds may distribute different types of income and can interact with local tax rules in taxable accounts, so consider fund-level tax characteristics when building a global allocation Vanguard research on indexing and costs.

Setting allocation, rebalancing, and risk tolerance

Size your equity share to match your retirement timing and risk tolerance rather than following a single rule. A longer time horizon normally allows a higher equity share, while nearer-term goals suggest more conservative allocations.

Simple rebalancing rules work well in practice: rebalance once a year or rebalance when an allocation drifts by a fixed threshold such as 5 percentage points. The goal is to keep turnover low while maintaining the intended risk profile SPIVA U.S. Scorecard.

Remember Buffett’s 90/10 example for trustees as a concrete, conservative default for a hands-off approach, but treat it as an illustrative starting point rather than a requirement for all investors 2013 Berkshire Hathaway shareholder letter.

Common mistakes and implementation pitfalls

Avoid common traps: ignoring expense ratios, trading frequently, poor tax placement, and chasing hot strategies. These behaviors increase costs and often reduce long-term results.

Fees and turnover compound over decades, which is why industry scorecards point to net-of-fees underperformance by many active funds compared with passive benchmarks; the practical fix is to prioritize low-cost funds and minimal trading SPIVA U.S. Scorecard.

Corrective actions include checking expense ratios before buying, placing tax-inefficient holdings in tax-advantaged accounts, setting automatic contributions, and using a clear rebalancing rule to limit emotional trading Vanguard research on indexing and costs.

Practical scenarios: examples and sample allocations

Conservative profile: Someone near retirement who prioritizes capital stability might favor a higher bond share and a lower equity share, keep an emergency fund, and hold equity exposure in tax-advantaged accounts where sensible. This approach reduces portfolio volatility.

Balanced profile: A mid-career investor may choose a diversified US total market index and an international allocation, automate contributions, and rebalance annually. That balances growth potential with moderate risk management Academic review on costs and persistence.

Growth profile: A long-horizon investor who tolerates market swings may emphasize equities, use low-cost total market funds, and accept higher short-term volatility for longer-term growth potential. Keep tax and account placement in mind.

These scenarios are illustrative. Match any allocation to your emergency savings, time horizon, and personal risk tolerance before implementing.

Final checklist and next steps

Checklist before you buy: confirm the fund’s benchmark, compare expense ratios, check tax treatment and account placement, set an allocation and rebalancing rule, and automate contributions where possible Vanguard research on indexing and costs.

Next steps: verify fund documents, open or use the appropriate account type, set up an automatic contribution plan, and review your plan at predetermined intervals rather than reacting to short-term market moves.

If you need further clarity on implementation, use the checklist in this article to verify choices and then take one small next step, such as setting up an automatic contribution or opening the right account for your situation.

References

• https://www.berkshirehathaway.com/letters/2013ltr.pdf
• https://www.berkshirehathaway.com/
• https://about.vanguard.com/investment-stewardship/
• https://www.spglobal.com/spdji/en/research-insights/spiva/
• https://jpm.pm-research.com/
• https://financepolice.com/advertise/
• https://financepolice.com/maximize-your-portfolio-returns-with-tax-efficient-investing-strategies-for-2026-and-future-years/
• https://financepolice.com/best-micro-investment-apps/
• https://financepolice.com/category/investing/
• https://www.investopedia.com/buffett-says-index-funds-beat-stock-picking-11724706
• https://www.morningstar.com/stocks/5-key-investing-themes-warren-buffetts-early-letters
• https://finance.yahoo.com/news/warren-buffetts-simple-advice-investors-193108468.html