Many investors have learned a hard lesson this year. The stock market can lose a lot of value very quickly. Record-low interest rates, stimulus measures and geopolitical strife have combined to push the inflation rate to its highest level in 40 years, triggering a stock market crash that wiped out $9 trillion in wealth from the during the first semester of 2022.
In fact, after sliding into a bear market on January 3, 2022, the S&P500 recorded its worst performance in the first half since 1970, and the general index fell for three consecutive quarters. Unfortunately, it is impossible to know when the bear market will end. But investors can take comfort in two facts.
First, the S&P 500 has survived more than a dozen bear markets over the past century, and each ended in a new bull market, meaning the index eventually recouped its losses and reached new heights. Second, bear markets have always been great times to invest. Half of the S&P 500’s best days over the past two decades have come in bear markets, and another 34% have come in the first two months of a new bull market (before it broke). clear that the previous bear market was over), according to Hartford Fund.
For this reason, now is the time to buy a S&P 500 Index Fund.
Advice from Warren Buffett: Buy America
In October 2008, the stock market crashed under the pressure of the Great Recession when warren buffet wrote a now famous editorial for The New York Times. I highly recommend reading the article in its entirety, as Buffett demonstrates a remarkable ability to keep a cool head in a devastating financial environment. But the four-word headline alone contains valuable information for investors: “Buy America. I am.”
The S&P 500 index is a barometer of the American economy. It tracks 500 of the largest US companies across all 11 equity sectors and represents an equal mix of value stocks and growth stocks. That means buying an S&P 500 index fund is like buying a slice of America, and it’s no surprise that Buffett has consistently recommended this strategy, especially in a bear market. Returning to the 2008 op-ed, Buffett explained that investors should relish bad news because “it allows you to buy a share of America’s future at a discount.”
Which S&P 500 index fund is the best?
Investors looking for an S&P 500 index fund have many good options. Warren Buffett actually owns two through Berkshire Hathawayinvestment portfolio. The first is the SPDR S&P 500 ETF (NYSEMKT: SPY)which is managed by State Street Global Advisorsand the second is the Vanguard S&P 500 ETF (NYSEMKT: VOO), which is operated by The Vanguard Group. The former has an expense ratio of 0.0945%, meaning investors would pay $9.45 per year on a $10,000 portfolio. The latter supports an expense ratio of 0.03%, meaning investors would pay $3 per year on a $10,000 portfolio.
Other than that difference, the SPDR S&P 500 ETF and the Vanguard S&P 500 ETF are essentially identical, and either is a good choice.
In a nutshell, patient investors can buy an S&P 500 index fund with confidence in a bear market, because the S&P 500 has recovered from every past downturn, and there is no reason to believe that the current downturn is different. That said, the S&P 500 could fall further in the months (or years) ahead, so investors should be prepared for hold despite volatility.
10 stocks we prefer to the SPDR S&P 500
When our award-winning team of analysts have stock advice, it can pay to listen. After all, the newsletter they’ve been putting out for over a decade, Motley Fool Equity Advisortripled the market.*
They have just revealed what they believe to be the ten best stocks for investors to buy now…and the SPDR S&P 500 was not one of them! That’s right – they think these 10 stocks are even better buys.
* Equity Advisor Returns as of November 7, 2022
Trevor Jennewin has positions in Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Berkshire Hathaway (B shares) and Vanguard S&P 500 ETF. The Motley Fool recommends the following options: $200 long calls in January 2023 on Berkshire Hathaway (B shares), $200 short puts in January 2023 on Berkshire Hathaway (B shares) and short calls of $265 in January 2023 on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.