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Buffett's Bet on the 500 Index Fund

Further endorsement for the merits of index investing comes from Warren Buffett, the chairman and CEO of Berkshire Hathaway and one of the most successful investors ever.

In 2007, Buffett offered to bet any taker $1 million—with the money to go to charity—that over ten years and after fees, an S&P 500 index fund would outperform ten hedge funds of the taker's choice. Protégé Partners, a New York money management firm, accepted the challenge. Its entry consisted of five funds of hedge funds, while Buffett selected Vanguard 500 Index Fund Admiral™ Shares.

According to Fortune, from the start of the contest on January 1, 2008, through the end of 2015, the 500 Index Fund returned a cumulative 65.67%, compared with 21.87% for Protégé's picks. Although there's more than a year left to go, Buffett clearly holds a sizable lead and appears to be on track to win his indexing bet.

Buffett's confidence in index funds is also on display in his 2014 annual letter to Berkshire shareholders. On page 20 of the letter, he notes that his estate plan calls for putting 90% of his bequest to his wife in "a very low-cost S&P 500 index fund (I suggest Vanguard's)" for her benefit.

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