Warren Buffett’s surprisingly simple advice for new investors entering the stock market
The ‘Mornings with Maria’ panel examines earnings and previews Q1 earnings for Nvidia and vendors.
Over the past 30 years, the S&P 500 index has generated a total return of 1,770% (as of June 5). That performance supports the idea that the stock market is one of the best asset classes for growing your wealth. A starting sum of $10,000 in this benchmark in June 1996 would be worth $187,000 today. The benefits have become even more remarkable over the past decade.
Understanding that this type of performance can have a significant impact on your financial well-being, it may be time for new investors to direct some of their savings to the stock market. Given how overwhelming it can seem, it can be difficult to figure out where to start.
This is where Warren Buffett comes into the picture. He is a great investor and a great teacher with advice to consider. If you are new to the stock market this month, listen to the advice of the Oracle of Omaha.
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Warren Buffett stepped down as CEO of Berkshire Hathaway late last year after a 60-year run. (Daniel Zuchnik/WireImage)
Keep it simple
Buffett is known for his exceptional financial skills, as he drove Berkshire Hathaway’s stock price up nearly 20% annually for six decades before stepping down as CEO at the end of last year. But his advice to most investors is surprisingly simple. Basically he recommends buying a cheap S&P 500 index fund.
This idea probably stems from the fact that the average person doesn’t have the time, ability, or desire to want to pick individual stocks and manage a portfolio. And from the inability of professional fund managers to beat the market.
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Active management techniques generally have a poor track record. The data shows that most large fund managers lose the S&P 500 over time. Whether these professionals trade too often, charge high fees, or are not smart portfolio managers, that’s a very disappointing statistic. And it makes you wonder why most investors don’t choose the passive route.
Over the past 30 years, the S&P 500 index has generated a total return of 1,770%, as of June 5. (Spencer Platt/Getty Images)
Consider this popular exchange-traded fund
One of the best options is the Vanguard S&P 500 ETF. It comes with a very low expense ratio of 0.03%. Over several years and decades, investors will pay a much smaller amount than what is usually charged by active managers. The difference leaves more money in your pocket.
| A ticker | Security | Finally | Change | change % |
|---|---|---|---|---|
| VOO | VANGUARD S&P 500 ETF – USD DIS | 679.68 | +1.68 |
+0.25% |
This ETF tracks the S&P 500 index, so its holdings are similar to the benchmark. The top five holdings are Nvidia, Apple, Microsoft, Amazon, and Alphabet, which clearly shows a strong position within the information technology sector. Investors will certainly be exposed to all things related to artificial intelligence.
However, it should be noted that this ETF covers all economic sectors. It’s actually a hassle-free way to gain exposure to broader markets.
Keep a long-term view
The S&P 500 index today is trading at a historically high price, casting doubt on the benchmark’s comeback potential. Although the amazing 10-year return of 316% may not be repeated, I think it still makes sense to invest in the stock market.
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Profit growth and margins are strong. And the leading companies, some of which have already been mentioned, are some of the most dominant businesses in the world, so they deserve the appreciation of the market.
| A ticker | Security | Finally | Change | change % |
|---|---|---|---|---|
| NVDA | The company NVIDIA CORP. | 208.64 | +3,54 |
+1.73% |
| AAPL | Company APPLE INC. | 301.54 | -5.80 |
-1.89% |
| MSFT | MICROSOFT CORP. | 411.74 | -4.93 |
-1.18% |
| AMZN | Company AMAZON.COM INC. | 245.22 | -0.81 |
-0.33% |
| GOOGL | Company ALPHABET INC. | 363.31 | -5.00 |
-1.36% |
If current valuation is a real concern for you, consider using the dollar-cost averaging (DCA) strategy. By doing so, you can put new money into the market every month or quarter, almost eliminating the need to check exactly what the initial rates should be.
And even adding a small amount to the DCA approach can lead to long-term results. Let’s say you first invest $10,000 in the Vanguard S&P 500 ETF. But every single month, you invest $100. Assuming the historical 10% annual compounding is true, you will have $382,000 after 30 years. Of course, if you put more money to work, the end result will be bigger.
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Neil Patel has positions in the Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Berkshire Hathaway, Microsoft, Nvidia, and the Vanguard S&P 500 ETF. The Motley Fool has a policy of disclosure.
