Warren Buffett recommended that most people simply buy a low-cost S&P 500 index fund.
He suggested buying one from Vanguard.
The S&P 500 has historically delivered an average annual return of 10% over the last century.
In his 2013 letter to shareholders, Warren Buffett advised that most people should simply buy an S&P 500 Index Fund (SNPINDEX: ^GSPC). He suggested Vanguard's, which would include the Vanguard S&P 500 ETF (NYSEMKT: VOO). Investors who followed that advice would be up 255% over the past decade (13.5% annualized). At that rate, VOO would have grown a $10,000 investment into over $35,640.
History suggests that the S&P 500 and the index funds tracking it, such as VOO, have plenty of room to grow. However, the near-term ride could be bumpy, given the market's currently historically high valuation and concentration levels.
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In his 2013 letter, Buffett wrote that the goal of non-professional investors shouldn't be to pick winning stocks. Instead, they should: "own a cross-section of businesses that in aggregate are bound to do well. A low-cost S&P 500 index fund will achieve this goal." He would go on to suggest Vanguard's very low-cost S&P 500 index fund. Investors can access it as an ETF (the Vanguard S&P 500 ETF) or as a mutual fund (Vanguard 500 Index Fund Admiral Shares).
The S&P 500 is up more than 255% over the past decade and 313% since he released that letter in February 2013 (11.9% annualized). The last 10 years have been especially strong for the market, driven by the rapid growth of technology companies capitalizing on digitalization, cloud computing, AI, and other related megatrends.
Historically, the stock market's average return over the past century is around 10% annually. That drives the view that the S&P 500 has room to grow from here.
There are also strong economic catalysts that could continue to drive meaningful revenue and earnings growth for S&P 500 members. We appear to be in the early days of the AI megatrend. Companies are investing unprecedented amounts of capital to build out AI infrastructure, such as data centers and power-generating capacity, to support this technology. They're also investing heavily to deploy AI-powered products to boost productivity. According to a report by PwC, AI will drive a 14% increase in global GDP by 2030. The $15.7 trillion projected boost is more than the current combined economies of China and India. That growth would benefit large technology companies, which make up a meaningful portion of the S&P 500.
While investing in a Vanguard S&P 500 Index fund has been a fantastic move since Buffett suggested it over a decade ago, the landscape has changed considerably in recent years. The index is currently at its most concentrated level since 1965 and its second-most overvalued level in 150 years. As a result, there's a higher risk for a near-term downturn than there was when Buffett first recommended the S&P 500 over a decade ago.
An S&P 500 index fund like VOO is the perfect investment for most people. It allows you to invest in 500 of the country's largest publicly traded stocks, which have historically delivered 10% annualized returns. While the S&P 500 appears to be at greater risk of a near-term sell-off these days, it's still an ideal long-term holding, as it has always eventually recovered and resumed its steady upward climb.
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Matt DiLallo has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.