Famed investor Warren Buffett recently doled out some free advice: Bet on America, and buy index funds. At Berkshire Hathaway's annual meeting earlier this month, he said: "For most people, the best thing to do is to own the S&P 500 index fund."
Looking ahead, Buffett is optimistic about his bet on America, even given the uncertainties about the pace of economic growth as a result of the coronavirus pandemic. In fact, he's instructed the trustee who will be in charge of his estate to invest 90% of his money into index funds for his widow.
Here's how a buy-and-hold investment in a fund tracking the S&P 500 would have worked out over the past 10 years.
Following Buffett's advice 10 years ago would certainly have paid off. Even though the U.S. stock market tumbled into its first bear market in more than a decade in March, the 2010s, after all, were one of the best decades ever for investors.
If you had invested $500 in an exchange-traded fund (ETF) that tracks the performance of the S&P 500 back in May 2010, that would have more than tripled in value and would be worth nearly $1,610 as of May 8, 2020, according to calculations by Grow. That works out to a return of more than 220%.
Rather than just calculating the change in price, which would be about 162% in that time period, we've calculated the total return. That assumes you reinvested the dividends — a portion of a company's or fund operator's profit — you earned each quarter, which is an easy way to grow the value of your portfolio.
An investment in an index fund tracking the broad stock market would have actually performed better than an investment in Buffett's own company, Berkshire Hathaway. Over the past 10 years, Berkshire Hathaway stock has risen nearly 140% but doesn't pay dividends. So an initial $500 investment 10 years ago in the lower-priced B shares of this company would be worth almost $1,190 today.
Video by Jason Armesto
The reason Buffett and other experts are fans of index funds is these investments provide an easy way to add diversification to your portfolio at a low cost. As a result, you don't have to worry about picking the winning stocks from the losers, because you'll get a mix of both. And keeping costs low is important because it won't cut into your returns over time.
Beyond those benefits are the long-term results. Historically, the U.S. stock market has delivered average annual returns of about 10%.
Even professional investors make some bad stock picks, as Buffett has learned over his decades of investing in the market. "With the exception of Berkshire, I would not want to put all my money in any one company," he said at this year's annual meeting.
In fact, looking ahead, he thinks investing in the broad market could offer a better return than his own business. "I would not want to bet my life on whether we beat the S&P 500 over the next 10 years."
Video by Jason Armesto
It can be tempting to invest in those stocks that are leading the market, but it's important to understand the associated risks. Buying individual stocks can be risky, since they can experience sharp fluctuations.
Instead, a safer and more reliable investment strategy is to buy index funds. And if you keep adding money to your portfolio regularly — a strategy known as dollar-cost averaging — that will ensure you don't invest all of your money when prices are at a peak.
Rather than trying to make a quick buck on a risky investment, it's smart to focus on the long term. Experts recommend building a portfolio made up of a diversified mix of stocks that tracks the market, because it's generally a much safer bet than investing in individual stocks, and then sticking with your investments over time.
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