Money

Here's the smartest way to invest your money

Warren Buffett
Paul Morigi | Fortune | Time Inc | Getty Images
Warren Buffett

Investing doesn't have to be complicated. In fact, the single most effective way to invest your money and save up for retirement is surprisingly simple: Let it grow in a low-cost index fund, such as the Vanguard 500 Index Fund.

As Blake Ross, the founder of Firefox, writes on Medium: "If you open a retirement account, and you invest some of your paycheck each month into a Vanguard Target Retirement Fund, and you just … leave it … you just leave it right there until retirement

"If you just leave it there to compound over decades … then you will probably make more money than if you hired the guy from Edward Jones, and even that Senior Executive Double-Stuff Vice Managing Director from Goldman Sachs."

But don't take Ross' word for it. Berkshire Hathaway chairman and CEO Warren Buffett would also recommend investing in index funds. As he tells CNBC: "Consistently buy an S&P 500 low-cost index fund. I think it's the thing that makes the most sense practically all of the time."

Index funds hold every stock in an index such as the S&P 500, including big-name companies such as Apple, Microsoft and Google. Because this type of fund is highly diversified, it stays relatively constant and avoids the risk that comes with picking individual stocks.

Plus, the fees tend to be low as well, which is what gives index funds a significant leg up on other investing platforms such as robo-advisors, Ross says: "As a non-profit that is owned by you and other shareholders, Vanguard is the only company in the financial industry that is not trying to make a huge profit off of you. Everyone else is talking their book. EVERYONE."

Warren Buffett
Paul Morigi | Fortune | Time Inc | Getty Images
Warren Buffett

The largest S&P 500 fund, Vanguard's 500 Index Fund, has an expense ratio of less than a percentage point, and as Buffett points out, "Costs really matter in investments. If returns are going to be seven or eight percent and you're paying one percent for fees that makes an enormous difference in how much money you're going to have in retirement."

In short, when it comes to investing your money, don't be a stock picker — go with low cost index funds. And stay the course, Buffett says, even when you see market fluctuations or a bad headline: "Keep buying it through thick and thin, and especially through thin. … American business is going to do fine over time, so you know the investment universe is going to do very well."

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