Buffett Says a Know-Nothing Investor Can Beat the Pros. $250 a Month in the S&P 500 Could Turn Into $508,000

Warren Buffett built a fortune through decades of expert stock picking, then told ordinary savers to ignore everything he knows. The reason why exposes a hidden cost most investors never calculate until it is far too late.

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Warren Buffett ran one of the most famous stock-picking operations in history, yet his advice to ordinary savers points away from stock picking. In his 1993 letter to Berkshire Hathaway (NYSE:BRK-B | BRK-B Price Prediction) shareholders, Warren Buffett argued that an investor who knows nothing about markets can outperform most investment professionals by investing periodically in an index fund.

Professionals have research teams, data terminals and decades of training. The claim still holds because of mechanics: Chase the pros and you could give up a six-figure difference over a working life.

The S&P 500 is the market’s average. Active managers, taken together, own the market too, so as a group they earn that average before costs. After costs, the group has to trail it. The know-nothing investor earns the average minus almost nothing. Those costs pile up in four places:

1. Management fees: An active fund charges a yearly percentage of your balance whether it beats the index or lags it. A low-cost S&P 500 fund charges a fraction of that.

2. Trading costs: Every buy and sell carries spreads and commissions. An index fund trades only when the index itself changes.

3. Tax drag: Frequent selling in a taxable account realizes capital gains yearly, shrinking the compounding base. Buy-and-hold postpones most of that bill.

4. Behavior: People with strong opinions act on them, and each move is a fresh chance to be wrong.

Automatic contributions remove the last trap by taking timing off the table. The money moves on payday, picking up more shares when prices fall and fewer when they rise. Here is what one of those costs does on its own. Run the plan below with a 1% annual fee and the return drops from 9.5% to 8.5%. The ending value shrinks to about $413,000. The fee costs roughly $96,000, more than every dollar you contributed.

The illustration uses $250 a month for 30 years, with an assumed constant annual return of 9.5% compounded monthly. The ending value is $508,000. The total money actually contributed is $90,000. Most of that balance is growth you never paid for. At year 20, the same plan holds about $178,000 on $60,000 contributed. The final decade does the biggest work because gains start earning gains of their own.