What does Warren Buffett tell you to do with your money? He probably recommends investing in low costs S&P 500 index fund. In fact, that’s exactly how his will dictates that most of the money his family inherits be invested.
Some retail investors may be concerned about stock market volatility after last year’s crash. But a study of history reveals something very interesting. This is an amazingly reliable way for investors to make money.
You will love the simplicity of this investment approach. There are only 3 steps:
- At the beginning of the year, look at the previous year’s S&P 500 returns.
- Invest in the S&P 500 index fund if the previous year’s returns were negative.
- Sell the S&P 500 index fund at the end of the year.
How reliable is this strategy? Over the past 83 years, he’s been profitable 82.6% of the time. If you find a Las Vegas casino that offers this kind of odds, it will go out of business quickly because so many gamblers have so much cash in their pocket.
We’re not even talking about petty profits. Following this approach has historically delivered an average annual return of 12.8%.
True, the actual return will be a little lower due to expenses. However, there are also some S&P 500 Exchange Traded Funds with lower expense ratios. for example, Vanguard S&P 500 ETF (VOO 1.84%) It only costs 0.03% per year. By purchasing this Index Fund ETF, you can keep most of the fantastic profits associated with this approach to yourself.
Things that seem so great usually have problems. Unfortunately, that is the case with this investment strategy.
what is this catch? The S&P 500 simply doesn’t have enough bad years. Since 1940, the index has finished the year with only his 24th loss. A really bad year is even rarer. He’s only seven times in its entire history that the S&P 500 has fallen more than his 19.4%, including last year.
The downside to these rare down years for the S&P 500 is that your cash will be much more parked on the sidelines. It doesn’t get bigger.
Sure, you can get some extra returns by moving your money into US Treasury bills when you’re not investing in an S&P 500 index fund. These T-bills are considered safe as they are backed by the US government. But your annual return will be much lower than the double-digit return we want.
Another More Reliable Approach
But I have great news. more A reliable approach to investing in and profiting from the S&P 500 Index Fund. And this is even simpler than the strategy just described. This approach has only two steps:
- Buy the S&P 500 Index Fund.
- Keep for at least 5 years.
This strategy is profitable 87.9% of the time. If you want to increase that percentage, simply hold the S&P 500 index fund longer. For example, buying and holding the S&P 500 for 10 years historically gave him a positive return 94.2% of the time.
Want to know all the best approaches? If you buy an S&P 500 fund and hold it for 20 years, everytime made money That’s right, this strategy is 100% profitable, dating back to his 1872.
Now you know why Warren Buffett wanted his family to invest in the S&P 500 index fund after his death. He knows it’s been a reliable way to make money in the past.
Keith Speights has a position in the Vanguard S&P 500 ETF. The Motley Fool owns positions in and recommends the Vanguard S&P 500 ETF. The Motley Fool’s U.S. headquarters has a disclosure policy.