In his 2013 letter to Berkshire Hathaway shareholders, Warren Buffett revealed his instructions for the trustee managing his wife's inheritance after his death. He didn't say to buy Berkshire stock. He didn't recommend gold or real estate. He said: put 90% in a low-cost S&P 500 index fund.
This from a man who has spent sixty years picking individual stocks for a living. If that's what he'd choose for someone he loves, it's probably worth understanding why.
What Is an Index Fund, Actually
An index fund is a type of investment fund that tracks a market index — a predetermined list of companies. The S&P 500 index, for example, contains the 500 largest publicly traded companies in the United States. When you buy an S&P 500 index fund, you're buying a tiny slice of all 500 of those companies at once.
The key difference between an index fund and a regular managed fund is this: a managed fund has a team of analysts and portfolio managers actively deciding which stocks to buy and sell, trying to beat the market. An index fund just follows the index. No decisions. No guesswork. Just the market.
That sounds boring. It is. It's also why it works.
Why Active Management Usually Loses
Every year, S&P Dow Jones publishes the SPIVA scorecard — a comprehensive study of how actively managed funds perform against their benchmark indexes. The results have been remarkably consistent for two decades. Over a 20-year period, roughly 90% of actively managed large-cap funds underperform a simple S&P 500 index fund.
Think about that. The people whose entire job is picking stocks, with access to research teams, financial models, and market data that retail investors will never see — 90% of them can't beat the index over twenty years. The ones who do beat it one year rarely repeat it the next.
How to Actually Start
Step 1: Choose an account type
Before you pick a fund, pick the right container. If you're in the US, a Roth IRA is typically the best starting point for long-term investing — your money grows tax-free and you pay no tax on withdrawals in retirement. If your employer offers a 401k with matching contributions, that comes first — the match is an instant 50–100% return on your money.
Step 2: Choose a broker
Vanguard, Fidelity, and Schwab are the three I'd recommend. All three offer index funds with extremely low expense ratios. Fidelity even offers some index funds with zero management fees. All three have solid mobile apps, no account minimums for most accounts, and commission-free trades.
Step 3: Pick your fund
For most people just starting out, a single total market fund or S&P 500 fund is all you need. VTI (Vanguard Total Stock Market ETF), FSKAX (Fidelity Total Market Index Fund), and SWTSX (Schwab Total Stock Market Index) are all excellent options with expense ratios of 0.03% or lower.
If you want international exposure — which I'd recommend — add a total international fund like VXUS. A simple two-fund portfolio of VTI and VXUS in roughly 70/30 proportion gives you ownership of essentially the entire global stock market at minimal cost.
Dollar-Cost Averaging: The Only Strategy You Need
Once you've chosen your fund and account, the only remaining decision is how much to invest and how often. The answer: a fixed amount, on a regular schedule, regardless of what the market is doing.
This is called dollar-cost averaging. When the market is down, your fixed contribution buys more shares. When it's up, it buys fewer. Over time, this averages out your cost basis in a way that tends to produce better results than trying to time the market — which, as we've established, even professionals can't do reliably.
Set up an automatic investment on your broker's platform. Choose an amount that's challenging but sustainable — something that leaves you a little uncomfortable but doesn't prevent you from covering bills and emergencies. Then do nothing. Don't check it daily. Don't panic when it drops 20%. Don't celebrate when it rises and throw more money in. Just let it run.
The Hardest Part Is Staying the Course
Between 2000 and 2002, the S&P 500 dropped about 49%. Between 2007 and 2009, it dropped roughly 57%. In both cases, investors who sold near the bottom and waited for things to "calm down" before reinvesting missed most of the subsequent recovery. The investors who kept buying during the crash — who treated falling prices as a discount rather than a disaster — were the ones who built real wealth.
Market crashes feel different when you're in them. The news is full of apocalyptic predictions. Your account value is visibly shrinking. The rational thing and the emotional thing pull in completely opposite directions. The only way to handle this is to decide your strategy before the crash happens, write it down, and commit to it. Having a plan made in calm conditions is the only reliable defence against decisions made in panic.
Index fund investing won't make you rich overnight. Over 30 years, at an average 7% annual return, a monthly contribution of $400 grows to approximately $454,000. That's not a lottery win — it's a retirement. And it requires almost no skill, almost no time, and almost no decisions beyond the ones you make at the start.
That's the whole point.
Further Reading
If this article has sparked an interest in long-term wealth building through stocks, one book I'd strongly recommend is Coffee Can Investing by Saurabh Mukherjea. It makes a compelling case for a specific style of buy-and-hold investing in high-quality businesses — patient, low-churn, and historically very effective. It's written for the Indian market but the core philosophy translates universally. The title comes from the old American practice of putting your most valuable assets in a coffee can and forgetting about them for a decade. The results, as Mukherjea documents with real data, tend to be remarkable.
