Published - May 15th, 2023 @ 11:15 PM (GMT+2 )
This investment strategy, frequently backed by Warren Buffett, is a sure bet. The preceding 16 months have been challenging for investors. Anticipation of a recession led to the S&P 500's fall into a bear market at the start of 2022, and the general index is currently 14% from its high. This equates to a staggering $6 trillion wiped off by economic uncertainties. However, the S&P 500 is now within reach of the bull market zone.
A bull market is conventionally defined as a 20% recovery from its lowest point, and the S&P 500 has currently rallied 16% from its lowest in the previous October. This development should excite investors. Historically since 1957, the average S&P 500 bull market has lasted 1,960 days, yielding an average return of 184%, as per Yardeni's data.
Investors can exploit this information by buying into an S&P 500 index fund.
Warren Buffett often endorses an S&P 500 index fund.
Being one of the most triumphant investors, he has become a guiding light in the finance industry. Investors scrutinize his every utterance and examine Berkshire Hathaway's Form 13F filings with the U.S. Securities and Exchange Commission for stock insights.
Buffett consistently suggests that an S&P 500 index fund is optimal for most investors to access the stock market. Buffett holds two S&P 500 index funds through Berkshire Hathaway: the Vanguard S&P 500 ETF (VOO -0.14%) and SPDR S&P 500 ETF Trust.
While they are practically equivalent, I prefer the Vanguard ETF because it's more affordable. It has an expense ratio of 0.03%, meaning investors would only spend $30 on annual fees for a $100,000 portfolio. The SPDR S&P 500 ETF Trust carries a slightly larger expense ratio of 0.0945%.
However, the investment rationale remains simple: The S&P 500 tracks the performance of 500 substantial U.S. firms. Its members cross all 11 market sectors, encompassing a mix of value and growth stocks.
This makes the index a standard for the wider U.S. economy, the world's largest. In the words of Buffett: "For 240 years, it's been a terrible mistake to bet against America, and now is no time to start. America's golden goose of commerce and innovation will continue to lay more and larger eggs."
Historically, the S&P 500 has been a reliable investment.
Since its inception in 1957, the S&P 500 has generated a positive return for every rolling 20-year period, and there's no reason to anticipate a different outcome in the future. This implies that any investor who purchases an S&P 500 index fund today is virtually assured of profits as long as they stay invested for at least 20 years.
Buffett opines: "I have yet to see a time when it made sense to make a long-term bet against America. And I doubt that any reader of this letter will have a different experience in the future."
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Index funds can transform patient investors into stock market millionaires.
Despite several bear markets and recessions in the past two decades, the S&P 500 has managed a total return of 556% (or 9.9% annually). Although this might seem modest, compounding can turn such annualized returns into substantial portfolio values over a long period. Investors who consistently contribute to an S&P 500 index fund can anticipate similar returns.
At a rate of 9.9% annually, an investment of $125 weekly in an S&P 500 index fund would grow to $103,000 in a decade, $368,000 in two decades, and reach $1 million in three decades. Alternatively, as my associate Courtney Carlsen explained, investing $500 monthly in the SPDR S&P 500 ETF over the last 20 years would have amassed $375,000 today.
Here's the takeaway: Investors who persistently contribute to an S&P 500 index fund, investing consistently regardless of market conditions, will almost assuredly be significantly wealthier a decade (or three) from now. Additionally, as the S&P 500 index approaches bull market territory, it's an opportune moment to commence (or continue) purchasing an S&P 500 index fund.
The information on mexem.com is for general informational purposes only. It should not be regarded as investment advice. Investing in stocks involves risk. A stock's past performance is not a reliable indicator of its future performance. Always consult a financial advisor or trusted sources before making any investment decisions.
