The market has been a bull market for the better part of seven years. I used this cool calculator to show that the annualized return for the S&P 500 is almost 11% from 2009 through present day. Even crazier, if you reinvested the dividend returns, the annualized return is over 13%!
Wow… That is an incredible return.
That means if you had $100,000 in the S&P 500 in 2009, it would be worth over $230k today (August 2017.) I started contributing to my 401(k) in 2011 and I just checked my annual rate of return. My portfolio returned 11.94% annually since 2011. Below is my current asset allocation, which I have adjusted over the years. I started contributing to the Vanguard 2050 target date fund and I changed to mostly Vanguard Index funds over the last two years:
My plan recently offered the well-known VTSAX index fund. It looks like I still need to transfer a little more out of the Vanguard 500 Index (which is a solid fund) to the Vanguard Total Stock Market Index (VTSAX).
Is a market crash coming?
Will the market crash soon? Sure, it could. However, I’m not worried because I am only 29 and I am early in my investment journey. Investing for the long-haul is something I firmly believe in because the history of the stock market returns is really quite good.
When it comes to investing, one person comes to mind that has been pretty successful – Mr. Warren Buffet.
What does Mr. Warren Buffet think about investing in the stock market?
First of all, Warren Buffet is the man. I somehow came across an article Warren Buffet wrote for the New York Times in October of 2008 named Buy American. I am. To summarize Mr. Buffet’s article on investing in the stock market:
Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a fly epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.
Simply put, negative events will happen in this world that will likely affect how the stock market performs. Recently, we had the dot-com crash in 2000 where the market toppled 78%. This was followed by the housing market crash in 2007-2009, where the S&P 500 declined roughly 57% over this period of time.
From 2000 through 2017, the VTSAX fund from Vanguard has returned about 10% each year on average. Yes, this DOES include the two market crashes. This is a superb return and if you have been invested in the stock market over this time, you will also have performed very well.
So how do you invest in the stock market but ensure you have the correct amount of diversification?
Index funds and passive investing. If you want to learn more, I’ve written two book reviews on books that discuss passive investing.
A third book that I read that I haven’t written a review on is The Simple Path to Wealth: Your road map to financial independence and a rich, free life by JL Collins. JL’s book is extremely popular, and many of the same principles that are discussed in JL’s book are similar to Scott’s book and Daniel’s book.
The chief principle is to invest in low-cost index funds in a “set it and forget it” or passive type implementation. I only have seven years of investing experience, so I am by no means an expert. I review my asset allocation every 3 to 6 months.
From reading these books, which I highly recommend, I’ve seen how passive investing has been successful for others.
Index funds enable you to invest in a single fund with exposure to many different companies. Taking Vanguard VTSAX as an example, this single fund offers exposure to the U.S. equity market, including small-, mid-, and large-cap growth and value stocks. With an expense ratio of 0.04%, you are basically getting access to this fund for free.
Back to Mr. Buffet…
Even though Warren Buffet has made a fortune picking stocks, he too agrees that passive investing is a solid approach. In Mr. Buffet’s Will, he advises his team to invest his fortune in low-cost index funds so his wife doesn’t have to worry about what to do with the money.
So what do you think Mr. Buffet would do today with the bull market we have going on?
Continue to invest in the stock market? Or pull back into bonds?
I would venture to guess Mr. Buffet would still support investing in the stock market because of his final remark in his 2008 article Buy American. I am:
“I don’t like to opine on the stock market, and again I emphasize that I have no idea what the market will do in the short term. Nevertheless, I’ll follow the lead of a restaurant that opened in an empty bank building and then advertised: “Put your money where your mouth where your money was.” Today my money and my mouth both say equities.”