Though Warren Buffett is slated to step down as Berkshire Hathaway’s CEO at the close of 2025, his profound investing principles will endure indefinitely.
A particularly memorable insight comes from his 2022 letter to Berkshire Hathaway shareholders, where he stated:
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“Despite our citizens’ penchant – almost enthusiasm – for self-criticism and self-doubt, I have yet to see a time when it made sense to make a long-term bet against America. And I doubt very much that any reader of this letter will have a different experience in the future.”
Considering the excellent performance of the S&P 500(SNPINDEX: ^GSPC) over the last decade and the significant capital directed towards S&P 500 index funds, it appears improbable that a widespread negative sentiment toward the U.S. stock market will emerge soon. In the long run, this trend is likely beneficial.
However, the short-term landscape presents unique hurdles. Valuations are elevated, geopolitical tensions in Iran are impacting oil prices and inflation, and international trade partners are increasingly seeking to lessen their dependence on the United States.
When immediate conditions seem difficult, it’s often wise to recall some of Buffett’s enduring advice for investors.
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Key Insights
Buffett has consistently advised investors to purchase and retain a low-cost S&P 500 index fund, rather than attempting to select individual stocks.
Fidelity reports that since 1980, the S&P 500 has experienced a decline of 5% or more in 93% of calendar years, and a 10% or greater drop in 48% of those years.
Warren Buffett recommended Vanguard’s S&P 500 index fund in his 2013 letter to Berkshire Hathaway shareholders.
Buffett’s Support for Long-Term Holding
A consistent message across many of Buffett’s statements is the principle of long-term buy-and-hold investing.
In his 2020 shareholder letter, Buffett observed: “Despite some severe interruptions, our country’s economic progress has been breathtaking.”
This could be interpreted as Buffett advising investors to remain invested in U.S. stocks rather than diversifying internationally, which is a reasonable interpretation. My personal take is that it serves as Buffett’s endorsement for holding investments indefinitely.
The phrase “severe interruptions” acknowledges that market fluctuations, including significant downturns, are inevitable. However, the subsequent mention of “breathtaking economic progress” prompts individuals to adopt a broader perspective, appreciating the substantial growth of the U.S. economy over many decades.
Fidelity reports that a 5% decline in the S&P 500 occurs nearly every year, with a 10% decline happening in roughly half of them. The U.S. has navigated major events like the Great Depression, the financial crisis, 1970s stagflation, the 2000 tech bubble burst, and the COVID pandemic. Yet, through it all, the economy continues to expand, and the S&P 500 repeatedly reaches new all-time highs.
Opt for a Cost-Effective S&P 500 Index Fund
Many are already aware that Buffett encourages investing in the S&P 500 for long-term growth. What might be less known is the precise nature of the investment he advocated.
In his 2013 Berkshire Hathaway letter, Buffett specified: “Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.)”
While these were instructions for his estate planner regarding provisions for his wife after his passing, this guidance is widely applicable. Investing doesn’t need to be complex; there’s no requirement to hold numerous stocks or funds. A straightforward approach of investing in large-cap U.S. stocks through the Vanguard S&P 500 ETF(NYSEMKT: VOO), complemented by Treasury bills for liquidity, can yield solid long-term returns.
It’s easy to become sidetracked by immediate events. However, Buffett has consistently, for decades, championed long-term buy-and-hold investing as the superior strategy.
Now would be an opportune moment to heed some of that counsel.
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David Dierking holds no positions in any of the companies mentioned. The Motley Fool possesses positions in and recommends Vanguard S&P 500 ETF. The Motley Fool’s disclosure policy can be found here.
