Many investors are eager to find the best assets in the world to accumulate wealth. But does the best asset really exist? Warren Buffett once said at Berkshire Hathaway’s virtual annual meeting that instead of blindly following investment advice or spending a lot of money on stock picking recommendations, it is better to just buy the S&P 500 index.
In fact, Buffett has been promoting the S&P index for the past 25 years. From 1993 to 2018, he recommended it a total of 14 times. Even in his will, he stated, “Invest 90% of the assets in the S&P 500 index and the remaining 10% in short-term US government bonds.” Seeing this, you must be curious why the S&P 500 index is favored by the stock market guru Buffett.
What is the S&P 500?
The three major stock price indices in the United States are the Dow Jones Industrial Average, the S&P 500 Index, and the Nasdaq Composite Index. The Nasdaq Composite Index is a stock price index of companies listed on the Nasdaq Stock Market. The Dow Jones Industrial Average and the S&P 500 Index, on the other hand, select high-quality companies including those listed on the New York Stock Exchange and Nasdaq to calculate the index.
The S&P 500 Index is a stock price index calculated based on the top 500 companies by total market capitalization of the New York Stock Exchange and Nasdaq. Unlike the Dow Jones Industrial Average, which only includes 30 companies in its calculation, the S&P 500 Index calculates the index based on 500 companies and is widely regarded as a representative stock price index of the US market. However, not all companies within the top 500 by market capitalization can enter the S&P 500. They must be US-based and have no deficit for the recent four quarters.
The S&P 500 Index includes many world-class companies. Apple, Microsoft, Amazon, Alphabet, Facebook, Buffett’s Berkshire Hathaway, Boeing, Coca-Cola, Goldman Sachs, IBM, Johnson & Johnson, McDonald’s, Netflix, Nike, Pfizer, Qualcomm, Starbucks, Walmart, Disney, 3M, and many other well-known companies are listed in this index. Of course, this index does not include European or Asian companies.
In the past 50 years, the S&P 500 Index has had negative 5-year average returns seven times and negative 10-year average returns twice. In 1973 and 1974, there were consecutive deficits due to the oil crisis, with a decline of more than 20% in 1974. From 2000 to 2002, there were three consecutive deficits due to the bursting of the dot-com bubble and the 9/11 attacks, resulting in a sharp decline in the stock market. In 2008, the financial tsunami caused a record decline of -37%.
Even after experiencing these major declines, the 10-year average return of the S&P 500 Index has only been negative twice, and the 15-year average return has not been negative. Even in the lowest year, there is a return rate of 4.24%.
From a result-oriented perspective, if you invest solely in the S&P 500, it would take at least 15 years to eliminate the risk of loss. Of course, if you invest during a strong upward trend, you can make a lot of profit in just 2 or 3 years. The 15-year period is a conservative assumption for the worst-case scenario.
Does this mean that all stock price indices will not incur losses if you invest for 15 years?
It is important to note that not all stock price indices will avoid losses if you invest for 15 years. The S&P 500 includes many world-class companies, which is why it takes at least 15 years to eliminate losses.
Many stock price indices, even if you invest for 20 years, may still result in losses. For example, the EURO STOXX 50 index, which is calculated based on the top 50 European companies, has had negative returns in the past 20 years. The Nikkei Stock Average, a stock price index of Japanese companies, has also had negative returns. In addition, although the Shanghai Composite Index in China has risen compared to 20 years ago, it is still at a level of -43% compared to its all-time high at the end of 2007. In other words, the inclusion of world-class companies in a stock price index will affect its returns.
The 20-year average return of the S&P 500 Index is 5.62%, and the 25-year average return is 9.07%. The longer the investment period, the lower the highest return rate and the higher the lowest return rate, approaching the average.
What is the annual average return of the S&P 500?
If someone invested $1 in the S&P 500 on January 1, 1970, by the end of 2020, the total return including dividends would be approximately $182.05, with an annual compound return rate of 10.74%.
By investing in the S&P 500, there is no need to watch financial news every day, predict future economic growth rates, inflation rates, or oil price trends. There is no need to examine where conflicts are happening or predict who will be elected president. There is also no need to investigate potential industry trends, search for competitive companies, calculate when to enter or exit the market, or spend effort selecting high-quality funds. Just put your money in the S&P 500 and forget about it, and you can achieve an annual return of 10.74%.
Why did Buffett advise his wife to invest in the S&P 500?
The most important thing in investment is not having to worry about it after investing. One should focus on their own business. However, for direct stock investing, it often requires a lot of effort. This can take away a significant amount of time from one’s life, which is regrettable.
In his will, Buffett wrote to his wife, “Invest 90% of the assets in the S&P 500 index and the remaining 10% in short-term US government bonds.” He said this to indicate that if one can personally manage investments and achieve higher returns than the S&P 500 index, that would be ideal. However, for the average person who cannot achieve such results, having returns similar to the S&P 500 is good enough.
Invest in the S&P 500 with 4E
4E, the world-leading asset trading platform and global partner of the Argentine national team, has launched an index trading area that supports the S&P 500 index (SPX500), the Dow Jones Industrial Average (US30), the Nasdaq 100 index (NDAQ100), the FTSE 100 index (UK100), the DAX index (Germany40), the CAC 40 index (France40), the Nikkei index (Japan225), and other highly recognized benchmark indices in the world. These are also the most active indices in trading.
Investors can use up to 100x leverage for long or short positions, with a minimum trade size of 0.1 lots and a margin requirement of only about $20. The platform is easy to use, and customer service is available 24/7 for any inquiries. Compared to other platforms in the market, 4E offers abundant liquidity and significantly lower spreads, providing more attractive trading conditions for investors.
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