Warren Buffett says this investment — present in his portfolio — always wins over time. This is what history tells us.

Warren Buffett has amazed us all for some time with his smart stock picks and market-beating portfolio. As president, he is driven Berkshire Hathaway at a compounded annual gain of more than 19% over 58 years — that compares to a similar 10% gain for the S&P 500 over that time period. Buffett believes in buying quality stocks that are undervalued, with the idea that the market will eventually recognize their potential. And keep it long term to benefit.

This strategy has paid off over time, with Buffett reaping major gains from his largest holding, Appleas well as longtime favorites such as Coca cola and American Express. Today, Berkshire Hathaway’s portfolio is worth more than $279 billion. That compares with about $107 billion a decade ago.

Buffett, however, doesn’t just rely on individual stocks for gains, and in fact, he says that a certain investment — which isn’t an individual stock — always wins over the long term. He owns this type of asset and encourages other investors to include it in their portfolios as well. Let’s find out more and consider whether history supports Buffett’s idea.

Image source: The Motley Fool.

Companies that power the economy

This Buffett-approved investment won’t help you outperform either but all of the largest companies powering today’s economy. I’m talking about a S&P 500 index fund. Buffett owns two in his portfolio: the SPDR S&P 500 ETF Trust (SPY 0.52%) and the Vanguard S&P 500 ETF (VOO 0.53%).

This type of fund buys shares of each of the S&P 500 companies, with them weighted to the same degree in the fund as in the actual index. In this way, the fund tracks the performance of the index. And when the index adds a new member, these funds will buy it to continue to reflect the performance of the index. For example, when Palantir Technologies joins the S&P 500 on Sept. 23, these funds will add the software company to their holdings. (At the same time, they will sell shares of any stocks that exit the index.)

This means that the funds are not static, but give you permanent exposure to the strongest companies of the day. Today, these companies, unsurprisingly, are in the information technology space, with the industry representing 31% of the index and these funds. That said, these investments still give you diversification. Eleven sectors are included, and of these, financials and healthcare also account for double-digit weights.

When investing in ETFs or exchange-traded funds, it’s important to look for those with an expense ratio of less than 1%, as an expense ratio that’s too high will hurt your returns over time. The SPDR and Vanguard S&P ETFs meet our criteria — at 0.09% and 0.03%, respectively.

Why Buffett Likes This Investment

Buffett likes index funds because they give investors immediate exposure “to a cross-section of businesses that, as a whole, are bound to do well,” he once wrote in a shareholder letter.

And Buffett emphasized that he puts his money where his mouth is. Not only does he own these ETFs right now, but in his will he asks a trustee to put 90% of his cash in an S&P 500 index fund (and the other 10% in short-term government bonds).

The billionaire investor says that over time, the S&P 500, a bet on American business, will win out. And this is where history comes in. Let’s look at how the S&P 500 has fared over the long term.

^ SPX data by YCharts

A look at the S&P 500 over the past 20 years shows tough times, but each time, the index has recovered and won. Even if you only held an index fund for five or six years, you would have seen a benefit — although as long-term performance shows, you’ll generally get the biggest win if you hold this investment as part of it. from your long-term holdings.

So history shows that Buffett is right about S&P 500 funds. Of course, a carefully selected selection of stocks could outperform the S&P 500 in any given time period. Buffett proved it. But like this famous investor, you could combine the two strategies — buying a selection of up-and-coming stocks and shares in an index fund — and set yourself up for growth and security down the road.