Stock investing doesn't need to be overly complicated. By buying and holding a low-cost fund that tracks the S&P 500, and subsequently reinvesting the dividends, investors would have grown their money by a healthy 211% over the past 10 years.
Keeping with this theme, Warren Buffett has often advocated for lay investors to put up to 90% of their capital into the Vanguard 500 Index Fund (VOO 1.00%) and the remaining 10% into short-term government bonds. Buffett favors this particular S&P 500 tracking vehicle because of its rock-bottom expense ratio of 0.03%.
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The wisdom behind this so-called "90/10 investing strategy" is underscored by the resiliency of the U.S. stock market as a whole. Since 1792, U.S. stocks have delivered an average annual return of 6.6%, easily outpacing the returns of risk-free assets like government bonds.
Is this Vanguard fund still a smart buy in 2024?
While this strategy has worked wonderfully in the past, there are some important issues investors should consider before they tilt their portfolios toward the S&P 500 in 2024.
First and foremost, there is no clear consensus on where the S&P 500 is headed in either 2024 or over the next couple of years. Bullish analysts argue that the S&P 500's 26.29% gain in 2023 is likely the start of a new bull market for U.S. equities based on historical precedent.
After all, bull markets have averaged four years in length since 1932, and 2023 would represent the first year of a new bullish period. Keeping with this theme, Oppenheimer analysts, who correctly predicted the surge in U.S. large caps last year, are calling for the benchmark index to rise by another 9% in 2024.
On the flip side, J.P. Morgan analysts are calling for the S&P 500 to fall by 12.1% from current levels, citing a string of headwinds such as sticky inflation, bloated tech valuations, diminishing savings accounts, geopolitical conflicts, overly optimistic expectations about interest rate cuts, and modest corporate earnings, for their pessimism.
Morgan Stanley strategists recently echoed similar views and advised investors to shift to value stocks in sectors like healthcare, financials, consumer staples, and industrials in 2024. They also suggested reducing exposure to U.S. large-cap tech stocks that make up more than a quarter of the S&P 500 by weight.
What's the smart play?
Analysts are often wrong on both ends of the spectrum. The S&P500/VOO may have a bad year or it may not. What's important to bear in mind is that buying this S&P 500 tracking vehicle is a bet on America. And it has always been a bad idea to bet against the American economy over long stretches.
Therefore, even though the S&P 500 may indeed be overvalued (23 times earnings) and an economic slowdown remains an important risk factor in the short-term, long-term investors shouldn't hesitate to dollar-cost average into this Vanguard fund this year.
After all, the VOO is a near lock to deliver positive returns, and perhaps spectacular ones at that, over the next 10 years.
