What Is The Smartest Way To Invest?

The Hollywood version of investing in the stock market is full of excitement. Movies show people shouting on the trading floor, and there are dramatic scenes in which lead characters make millions overnight, only to lose it all in a market crash.

Not that those things don’t happen from time to time, but for the most part, people who are in the market to get rich quickly are unlikely to be successful outside of the movies.

The world’s best investors know that the smartest way to invest doesn’t have the excitement and drama of the stories that play out on the big screen. However, their go-to investment strategy is far more effective than the Hollywood version when the goal is building long-term wealth.

What Investment Strategy Does Warren Buffett Use?

Warren Buffett (net worth $116.9 billion) is one of the most successful investors of all time, but there haven’t been any blockbuster films released about his career.

That’s because Buffett’s story doesn’t have the thrill of entrepreneurs like Steve Jobs and Mark Zuckerberg. Instead, Buffett took a steady, thoughtful approach to acquiring assets – an approach that still forms the foundation of his investment decisions today.

Buffett doesn’t get involved with the latest fads, and he rarely pays attention to emerging companies that haven’t turned a profit. He focuses on established businesses that have proven their ability to navigate economic ups and downs. They have financial stability, a sustainable growth plan, excellent management, and a wide moat – the Buffett term for a competitive edge that is difficult to overcome.

Through his holding company, Berkshire Hathaway, Buffett controls a stock portfolio valued at more than $300 billion. When the rest of Berkshire Hathaway’s assets are added in, including dozens of wholly owned subsidiaries, the company’s market cap is upwards of $730 billion.

Berkshire Hathaway Class A stock is the most expensive in the world. As of mid-June 2023, it traded at $514,000 per share. The Class B stock is more affordable at just under $340 per share, but even Buffett says that Berkshire Hathaway stock is not for everyone.

On many occasions, Warren Buffett has said that trying to buy and sell stock in any company, including his own, requires commitment and discipline. There is a lot of research involved in stock market investing if the goal is to grow a robust portfolio. Fortunately, when investors don’t have the time and interest necessary to put a lot of work into studying individual companies, there is an alternative.

In a 2017 appearance on CNBC’s On The Money, Warren Buffet said:

Consistently buy an S&P 500 low-cost index fund. I think it’s the thing that makes the most sense practically all of the time. Keep buying it through thick and thin, and especially through thin.

Is he right? Is an S&P 500 index fund the smartest way to invest?

What Is The Smartest Investment Strategy For Beginners?

The beauty of an S&P 500 index fund is the simplicity. The index is made up of 500 leading companies, so diversification is built in automatically. Examples of S&P 500 companies include Amazon, Apple, Berkshire Hathaway, Exxon Mobil, UnitedHealth, and Visa.

Index funds are designed to track their underlying indexes, so the assets held by an S&P 500 index fund mirror the S&P 500. When the index goes up, the fund increases in value. When it goes down, the fund’s value goes down as well.

With that in mind, the key question is can the S&P 500 be relied on to go up? After all, didn’t it lose 18.2 percent of its value in 2022?

Will The S&P 500 Go Up?

There are no guarantees in the stock market, so it’s impossible to say for sure that the S&P 500 will go up. However, its history shows that until now, it has always recovered losses and gone on to achieve new highs.

The S&P 500 has only had six down years since 1994 – and the dates are not coincidental. All were connected to specific economic situations. Three of the S&P 500’s down years were consecutive – in 2000, the index dropped 9.7 percent, then it lost another 11.9 percent in 2001. In 2002, the S&P 500 dropped another 21.6 percent. These losses were related to the dot-com bubble burst.

The five years that followed brought a series of substantial gains, followed by the devastating crash of 2008. That year, the S&P 500 ended with a loss of 36.8 percent, but in 2009 it was up 26.4 percent. In fact, after the global financial crisis, the S&P had nine consecutive years of gains – most in the double digits. The index saw a small loss in 2018 – 4.6 percent – but in 2019, it closed the year 31.2 percent higher.

The S&P 500 didn’t end 2020 or 2021 with losses, despite the COVID-19 pandemic. At the end of 2022, it was down 18.2 percent, but it has already gone up more than 15 percent year-to-date in 2023.

In short, over the past two decades, the S&P has averaged annualized returns of roughly 10 percent, which is far better than any traditional bank product. Though there will be more down years over the next two decades, there is every reason to believe that total returns over that period will exceed most individual stocks.

Best S&P 500 Index Funds

Choosing the best S&P 500 index fund can seem overwhelming based on the sheer number available. However, narrowing down the options is simple when three criteria are considered:

• Does the fund performance track the S&P 500 closely? It should.

• What is the expense ratio? Be skeptical of anything over 0.03 percent for an S&P 500 ETF or 0.04 percent for an S&P 500 mutual fund.

• Is the fund managed by a reputable firm? Respected companies like Vanguard, Schwab, and Fidelity have the experience and expertise to care for your assets properly.

The bottom line is that investors who are new to the market or lack the time and interest to do a lot of research are better off putting funds into a low-cost S&P 500 index fund and leaving the funds there to grow.

Historically, the S&P has always gone up long-term. Though the gains are slow and steady, without all the excitement of Hollywood dramas, they are reliable – and reliable is a good thing when it comes to building wealth.

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