Why Warren Buffett Says Index Funds Beat Stock Picking for Most Investors

Warren Buffett, arguably the greatest stock picker of all time, has a surprising piece of advice for everyday investors: don’t do it. “A very low-cost index is going to beat a majority of the amateur-managed money or professionally managed money,” Buffett has said.

Despite building his $166 billion fortune through careful analysis and selecting undervalued companies as the longtime chairman and CEO of Berkshire Hathaway Inc. (BRK.A), Buffett says his approach requires expertise, time, and emotional discipline that most investors lack. This seeming contradiction between Buffett’s personal investment strategy and his advice to the public reveals essential truths about investing that can help anyone build wealth more effectively.

What Are Index Funds and Why They Work

Index funds hold every stock in a specific index, such as the S&P 500 index, which includes major companies like Apple Inc. (AAPL), Microsoft Corp. (MSFT), and Meta Platforms, Inc. (META). Unlike actively managed funds, where managers attempt to select winning stocks, index funds simply mirror the entire market or a specific segment of it, which is why holding these funds is called “passive investing.”

Buffett recommends them for several reasons. First, fund managers trade far less frequently (the indexes don’t change often), which means fees and taxes tend to be lower than those of actively managed alternatives. “Costs really matter in investments. If returns are going to be 7% or 8% and you’re paying 1% for fees, that makes an enormous difference to how much money you’re going to have in retirement,” Buffett says.

The data support this view. According to S&P Global Inc. (SPGI), 64% of actively managed funds failed to match the S&P 500’s returns in 2024.

In addition, Buffett argues that it’s extremely difficult for individual investors to consistently identify undervalued stocks. The challenge is magnified by the fact that investment success often hinges on just a few outstanding performers. An Arizona State University study found that fewer than 100 stocks accounted for half of the stock market’s total wealth creation over a 90-year period up to 2024, with similar results for most historical periods. The lesson is clear: if you don’t own the few outperforming stocks, you have virtually no chance of beating the index.

Even Buffett, with his extraordinary track record, admits the challenge. In his 2022 shareholder letter, he summarized nearly six decades of managing money: “At this point, a report card from me is appropriate: In 58 years of Berkshire management, most of my capital-allocation decisions have been no better than so-so.”

The Bottom Line

Buffett argues that, for most investors, simplicity, discipline, and lower costs are more likely to build wealth than attempting to outsmart the market. “The goal of the nonprofessional should not be to pick winners,” he wrote in 2013. “Instead, they should own a cross-section of businesses that in aggregate are bound to do well. A low-cost S&P 500 index fund will achieve this goal.”