A Bull Market Is Coming: 1 Warren Buffett Index Fund to Buy in 2023 and Hold Forever

Economic growth slowed last year as high inflation and rising interest rates weighed on consumer spending. This headwind cut into corporate profits and raised fears of a recession, which led to a deep fall in the stock market.

That S&P 500 had its worst year since the Great Recession. The broad-based index fell into bear market territory on the first trading day of 2022 and is still 19% off its high.

That downturn has put a dent in many portfolios, but investors need to keep their heads straight. Previous bear markets have always ended in bull markets that drove the S&P 500 to new highs, and there’s no reason to expect a different outcome this time. That’s why investors should treat the drawdown as a buying opportunity.

Here’s advice from Warren Buffett.

Warren Buffett has often recommended an S&P 500 index fund

It is no coincidence that Buffett is considered one of the most successful investors in history. Under his leadership, Berkshire Hathaway has become one of the largest companies in the world, and its investment portfolio of 300 billion dollars is packed with stocks that have grown in value several times, including Coca Cola, American Expressand Chinese electric car manufacturer place bid. Meanwhile, Buffett himself has amassed a fortune of $100 billion.

These bona fides make his investment advice particularly credible, and Buffett has often said that an S&P 500 index fund is the best way for most investors to gain exposure to the stock market.

In fact, he believes that the average investor can actually outperform most professional money managers by regularly buying an S&P 500 index fund. The key word is on a regular basis. Investors should increase their position through thick and thin to avoid the pitfalls of market timing.

Buffett once bet half a million dollars on the S&P 500

Buffett once bet $500,000 that no professional investor could outperform an unmanaged S&P 500 index fund over a 10-year period. Protége Partners accepted the challenge and the firm selected five hedge funds managed by five financial experts who employed several hundred other financial experts. Suffice it to say, Protége tried very hard to beat Buffett.

The bet began in December 2007, shortly before the S&P 500 collapsed during the Great Recession. The index ultimately lost 56% of its value, marking its steepest decline since the Great Depression.

But Buffett still won the bet. The S&P 500 eventually recouped its losses, returning 126% by the end of the 10-year period. Meanwhile, the best and worst Protége hedge funds returned 88% and 3%, respectively.

Buffett made his point. He beat hundreds of highly trained financial experts without doing any work. He simply bought a Vanguard S&P 500 index fund and held it. It doesn’t get much easier than that.

Vanguard S&P 500 ETF

That Vanguard S&P 500 ETF (FLIGHT -1.09%) tracks the performance of 500 large US companies. It includes value and growth stocks from all 11 market sectors and has an expense ratio of just 0.03%. In other words, the Vanguard S&P 500 ETF allows investors to diversify across a number of blue chip U.S. companies, and it costs next to nothing.

The top 10 holdings in the Vanguard ETF are detailed below:

  1. Apple: 6.3%
  2. Microsoft: 5.4%
  3. Alphabet: 3.3%
  4. Amazon: 2.7%
  5. Berkshire Hathaway: 1.6%
  6. Nvidia: 1.4%
  7. ExxonMobil: 1.4%
  8. UnitedHealth Group: 1.4%
  9. Tesla: 1.4%
  10. Johnson & Johnson: 1.3%

Admittedly, an S&P 500 index fund is somewhat boring compared to individual stocks, but investors shouldn’t confuse boring strategies with bad strategies.

The S&P 500 has consistently delivered solid returns over long periods of time. For example, the index has returned a total of 600% over the past two decades, or 10.2% annually. At that rate, $150 invested each week would be worth $457,000 in two decades, and it would be worth $1.3 million in three decades.

To summarize, the investment thesis is straightforward: The Vanguard S&P 500 ETF is a cheap and easy way to spread capital across hundreds of excellent companies, and investors can reasonably expect 10% annual returns over the long term. Therefore, 2023 is a good time to start buying this ETF.

American Express is an advertising partner of The Ascent, a Motley Fool company. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Trevor Jennewine has positions in Amazon.com, Nvidia, Tesla and the Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Alphabet, Amazon.com, Apple, BYD, Berkshire Hathaway, Microsoft, Nvidia, Tesla and the Vanguard S&P 500 ETF. The Motley Fool recommends Johnson & Johnson and UnitedHealth Group and recommends the following options: long January 2024 $47.50 calls on Coca-Cola, long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a non-disclosure policy.

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