If Billionaire Bill Ackman Could Buy and Hold Only 1 Investment Over the Next Decade, Here's What He'd Buy

Bill Ackman's portfolio consists of just a handful of stocks across both his Pershing Square (NYSE: PS) funds. The hedge fund manager prefers to operate a concentrated portfolio of investments, focusing on his best ideas for long-term capital appreciation. For the most part, he's happy to hold a stock as long as necessary for his investment thesis to play out or be proven wrong.

One might expect Ackman to recommend one of his funds' top or longest-tenured holdings as the best investment to buy and hold for the next 10 years. Perhaps he'd recommend Howard Hughes Holdings, which Pershing Square acquired a controlling stake in with the intention of transforming it into an investment-led insurance business. But readers won't find Ackman's recent recommendation in any of Pershing Square's investment vehicles.

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Ackman's top recommendation is pretty simple

Despite his ability to identify long-term market dislocations among stocks, groups of stocks, and other assets, Ackman keeps his top recommendation for long-term buy-and-hold investors simple. "Pick an index fund," he said during an interview recently with Forbes, when asked where he'd invest 100% of his capital today for the next decade. Specifically, an equity index fund.

His recommendation echoes that of Warren Buffett, who has been a longtime advocate of index funds.

It might seem contradictory for two investment managers to recommend broad index funds, but the reasoning is sound. Ackman shied away from a single stock recommendation. "I love all my children; I love all our stocks," he told a reporter from Forbes when pressed. Indeed, the value of individual stock picking comes from building a portfolio. Not every stock is going to outperform the S&P 500, but a well-constructed portfolio can. Putting 100% of capital into a single company is foolish, with a lowercase "f."

A stock index fund offers diversified exposure to the equity asset class, which comes with two main advantages, according to Ackman. A widely traded broad-market index fund, such as the Vanguard S&P 500 ETF (NYSEMKT: VOO) or the Vanguard Total Market ETF (NYSEMKT: VTI), is extremely liquid. While the goal is to buy and hold for a decade (or longer), liquidity is important to ensure you can access the full value of your investment when you need it.

More importantly, no other asset class offers the long-term growth potential of equities. History shows stocks produce more than twice the returns of bonds over the long run. That trend is unlikely to change. One could also argue that Ackman doesn't see as much potential in real estate as he does in equities. He's planning to take cash flow from Howard Hughes' real estate operations and invest it in stocks through an insurance business.

One area Ackman would avoid

Unprompted for an asset or stock to avoid, Ackman said, "I wouldn't buy bonds."

As mentioned, bonds have historically produced lower returns than stocks over the long run. That said, bonds can have periods of outperformance. Buying bonds in the 1980s and holding them through the 2020s produced phenomenal results as interest rates fell to record lows. But even with interest rates climbing higher again in recent years, Ackman still doesn't think buying them, or an index fund like the Vanguard Total Bond Market Index Fund ETF (NASDAQ: BND), is a good idea.

Indeed, the demand for capital right now is absolutely massive. Artificial intelligence (AI) companies are spending hundreds of billions of dollars per year to build new data centers and outfit them with chips, networking equipment, and cooling systems. Despite the substantial cash flow generated by other parts of the business, hyperscalers are now spending more than they bring in. New capital has to come from somewhere, and with a limited supply of capital, the cost of capital is set to climb. That means higher interest rates for new issues (and lower prices for existing bonds).

Adding to the challenge is inflation's stubbornness. New Federal Reserve Chairman Kevin Warsh is extremely focused on bringing inflation back to the Fed's 2% target, and that may require hikes in the federal funds rate. The market is currently pricing in strong odds of one or two rate hikes before the end of the year.

So, not only do bonds have lower historical returns, but they also have a poor near-term outlook that could weigh on returns over the next decade relative to stocks. That said, they still hold some value for diversification and smoothing out the ride, but bond returns could be lower than average for the foreseeable future. Ackman's recommendation for a simple stock index fund is grounded in sound principles and makes sense for the average investor looking to buy a single investment to hold for the long run.

Adam Levy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Howard Hughes, Vanguard S&P 500 ETF, and Vanguard Total Bond Market ETF. The Motley Fool has a disclosure policy.