Over the past 30 years, the S&P 500 index has generated a total return of 1,770% (as of June 5). That performance supports the view that the stock market is one of the best asset classes for growing your wealth. A starting sum of $10,000 in this benchmark in June 1996 would be worth $187,000 today. The gains have been even more remarkable over the past decade.
Understanding that this kind of performance can have a profound impact on your financial well-being, it might be time for new investors to direct some of their savings into the stock market. Given how daunting it might seem, it can be difficult to figure out where to even begin.
Here’s where Warren Buffett comes into the picture. The great investor is also a wonderful educator whose advice is well worth considering. If you’re new to the stock market this month, listen to the Oracle of Omaha’s suggestion.
Image source: The Motley Fool.
Keep it simple
Buffett is known for his exceptional capital allocation skills, having compounded Berkshire Hathaway‘s share price at a yearly clip of almost 20% for six decades before stepping down as CEO at the end of last year. But his advice for most investors is surprisingly simple. He basically recommends buying a low-cost S&P 500 index fund.
This perspective probably comes from the fact that the average person doesn’t have the time, ability, or desire to want to pick individual stocks and manage a portfolio. And it stems from the inability of expert fund managers to beat the market.
Active management strategies generally have a bad track record. Data shows that the vast majority of large-cap fund managers lose to the S&P 500 over the long term. Whether these professionals trade too often, charge high fees, or just aren’t adept portfolio managers, that is a very disappointing statistic. And it makes you wonder why more investors don’t choose the passive route.
Consider this popular exchange-traded fund
One of the best options is the Vanguard S&P 500 ETF (VOO +0.25%). It comes with an extremely low expense ratio of 0.03%. Over several years and decades, investors will pay a significantly smaller amount than what active managers typically charge. The difference leaves more money in your pocket.
This ETF tracks the S&P 500 index, so its holdings match the benchmark. The top five holdings are Nvidia, Apple, Microsoft, Amazon, and Alphabet, clearly showing a strong position within the information technology sector. Investors will certainly be exposed to all things related to artificial intelligence.
However, it’s worth pointing out that this ETF contains all sectors of the economy. It’s essentially a hassle-free method for gaining broad market exposure.
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Maintain a long-term perspective
The S&P 500 index today trades at a historically expensive valuation, calling into question the benchmark’s return potential. While the phenomenal trailing 10-year total return of 316% might not repeat, I think it still makes sense to invest in the stock market.
Profit growth and margins are robust. And the companies leading the charge, some of which were mentioned already, are some of the most dominant businesses the world has ever seen, so they deserve the market’s appreciation.
If the current valuation is a real concern for you, then consider adopting a dollar-cost averaging (DCA) strategy. By doing so, you could allocate fresh savings to the market on a monthly or quarterly basis, virtually eliminating the need to accurately assess what the correct starting valuation should be.
And even adding small sums of money to a DCA approach can lead to tremendous long-term results. Let’s say you initially invest $10,000 into the Vanguard S&P 500 ETF. But then every single month, you invest $100. Assuming the historical 10% annualized total return holds true, you’d have $382,000 after 30 years. Of course, if you put more money to work, the ending figure will be larger.
Neil Patel has positions in Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Berkshire Hathaway, Microsoft, Nvidia, and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
