Warren Buffett’s investment acumen has astounded observers for decades, with his astute stock selections and outperforming portfolio at the helm of Berkshire Hathaway. Over 58 years, he has steered the conglomerate to over a 19% compounded annual growth rate, leaving the S&P 500’s 10% increase of the same era in the dust. Buffett’s philosophy revolves around securing undervalued, high-quality stocks, anticipating that the market will eventually recognize their latent potential. The Oracle of Omaha’s approach hinges on long-term holding to reap the benefits.
This strategy has stood the test of time, reaping substantial rewards from significant holdings like Apple, as well as enduring favorites such as Coca-Cola and American Express. Presently, Berkshire Hathaway’s portfolio is valued at over $279 billion, a substantial leap from about $107 billion a mere decade ago.
While Buffett doesn’t solely depend on individual stocks for gains, he staunchly advocates for a specific investment that guarantees winning outcomes in the long haul. Owning this type of asset himself, he urges fellow investors to incorporate it into their portfolios. Let’s delve deeper into this recommendation and scrutinize whether history aligns with Buffett’s convictions.
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Driving the Economy: A Closer Look at the Companies
This endorsed investment by Buffett offers exposure to the performance of not just one, but all the major companies driving today’s economy. It involves an S&P 500 index fund. Within his portfolio, Buffett holds two such funds: the SPDR S&P 500 ETF Trust (NYSEMKT: SPY) and the Vanguard S&P 500 ETF (NYSEMKT: VOO).
This type of fund acquires shares from every S&P 500 company, weighting them proportionally to the actual index. Consequently, the fund mirrors the index’s performance. Whenever the index welcomes a new member, these funds adjust their holdings accordingly to track the index’s trajectory. For instance, when Palantir Technologies becomes an S&P 500 constituent on Sept. 23, these funds will incorporate the software firm into their holdings. Similarly, they will divest shares of exiting stocks.
This dynamic nature ensures that these funds provide exposure to the leading companies of the era. At present, it comes as no surprise that these enterprises are primarily in the realm of information technology, constituting 31% of both the fund and the index. However, it’s worth noting that these investments offer diversification as well, with financials and healthcare sectors holding double-digit allocations within the index.
When considering ETFs, it’s crucial to opt for those with an expense ratio below 1%, as excessively high fees can erode returns over time. The SPDR and Vanguard S&P ETFs meet this criterion, boasting expense ratios of 0.09% and 0.03%, respectively.
Buffett’s Affection for this Investment
Buffett’s fondness for index funds stems from their immediate exposure to a diverse array of businesses that, collectively, are poised for success, as he once articulated in a shareholder letter.
Buffett goes the extra mile to endorse his belief in these ETFs, not only currently holding them but also directing a trustee in his will to allocate 90% of his assets into an S&P 500 index fund (with the remaining 10% in short-term government bonds).
The billionaire investor contends that, over time, the S&P 500, symbolizing a wager on American enterprise, will emerge victorious. This is where historical data comes into play. Let’s delve into the long-term performance of the S&P 500.
An examination of the S&P 500 over the past 20 years reveals challenging periods, yet the index has invariably rebounded and surged. Even holding an index fund for a mere five or six years would yield benefits, although sustained ownership, as demonstrated by long-term performance, typically leads to the most substantial gains.
History unequivocally corroborates Buffett’s stance on S&P 500 funds. While a select group of meticulously chosen stocks may outperform the S&P 500 during specific periods, as Buffett has exemplified, combining both strategies—investing in promising individual stocks alongside shares in an index fund—can pave the way for enduring growth and financial security.
Is Investing $1,000 in SPDR S&P 500 ETF Trust a Wise Move?
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American Express is an advertising partner of The Ascent, a Motley Fool company. Adria Cimino has positions in American Express. The Motley Fool has positions in and recommends Apple, Berkshire Hathaway, Palantir Technologies, and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
