Vanguard is now one of the world's largest investment funds, managing about $5.6 trillion in assets, and Buffett is a huge fan. But the late investor held firm to his belief that index funds would offer a way for investment firms to act efficiently and honestly, and still make money.

Jack Bogle, the founder of Vanguard, debuted the first index mutual fund in 1976 to raucous criticism. Buffett says index funds are 'the most sensible equity investment' for most people Importantly, there's no market timing or individual stock picking involved - the fund simply tracks the performance of the stock index.

This results in automatic diversification, which minimizes your overall risk. In the case of an S&P 500 index fund, you're buying a small piece of the 500 largest publicly traded US companies. Index funds may sound intimidating, but they're just a basket of stocks that represent a broad market.