The S&P 500 index (^GSPC +0.58%) has followed the Nasdaq Composite (^IXIC +1.20%) into correction territory, with both having fallen 10% from their peaks. That's got Wall Street worried that the next stop could be a 20% decline, which would indicate a bear market.
Warren Buffett's advice to buy an S&P 500 index fund is still a good idea, even though he sold the index funds Berkshire Hathaway (BRK.A 0.14%)(BRK.B +0.04%) owned at the end of 2024. Here's why.
One graph is all you need to understand the power of investing in the stock market
The graph below charts the path of a $10,000 investment in the Vanguard 500 Index Fund Admiral Shares (VFIAX 0.16%) from Aug. 31, 1978 until March 13, 2025. The S&P 500 index dipped into correction territory on March 13, so this chart includes the roughly 10% pullback that has Wall Street so worried about the future today. But look at the ending value of that original $10,000 investment. Assuming dividends were reinvested all along the way, this Vanguard 500 index fund would now be worth $1.8 million.
VFIAX Total Return Level data by YCharts.
That's a more than 18,000% return! However, the really interesting thing about the graph right now isn't the total return. It is the zigs and zags along the way to that return. The shaded portions of the graph are recessions, which largely coincide with large price drops. Some of the biggest drops, including the painful decline during the Great Recession when there were fears of a global economic collapse, now look like little more than blips along a steadily rising path.
Buying and holding this broad-based, U.S.-centered index has clearly been a winning, and very simple, strategy. That's why Warren Buffett has suggested that most investors would do well to just buy the S&P 500 index and, by extension, spend the rest of their time saving money and living their lives.
Image source: Getty Images.
But what about Buffett's S&P 500 ETF sales?
Here's the problem with Buffett's advice. He hasn't taken it himself, with Berkshire Hathaway recently selling its entire position in the SPDR S&P 500 Trust ETF (SPY +0.57%) and the Vanguard S&P 500 ETF (VOO +0.55%). That may sound like a bit of hypocrisy.
But what many stories haven't pointed out is that the two ETF positions made up less than 0.01% of Berkshire Hathaway's stock portfolio. So they weren't material to his investment approach. There certainly isn't reason to believe that Buffett was trying to time the market.
Market timing is still a very tough game to win consistently. It's easier and still very effective to simply buy and hold. That includes through both the bull and bear cycles that are a normal part of the market.
You can fine-tune the approach, if you want
That said, you don't have to follow Buffett's advice to the letter for it to work well. The proliferation of index-based exchange-traded funds (ETFs) has increased the index universe far beyond the S&P 500 index. That index is a great one to choose, but you may be a dividend investor looking to use the income your portfolio generates to help pay for living expenses. If that's the case, you could choose an ETF like the Schwab U.S. Dividend Equity ETF (SCHD 0.03%), where the 3.4% yield is multiples of the 1.2% on offer from the S&P 500 index.
SCHD Total Return Level data by YCharts.
Notably, the Schwab U.S. Dividend Equity ETF uses a screening process to highlight companies that are financially strong, growing, and have rewarded investors with regular dividend increases. If you spend the income, you won't benefit from the compounding effect of dividend reinvestment. But as the chart above shows, the share price of the ETF has risen nicely and the dividend has trended higher over time. All an investor needed to do was buy and hold, which is basically the advice Buffett has given with regard to the S&P 500 index.
The real key is the buying and holding of an index. The index needs to be reasonably constructed, which the Schwab U.S. Dividend Equity ETF is. If you buy into Buffett's buy-and-hold-an-index advice, however, don't ignore the fact that the S&P 500 index has fallen into a correction.
A downturn could end up being a great opportunity for long-term investors to buy more of the index they have chosen. That will allow you to benefit from what is likely to be an eventual market recovery. If history is any guide, it is just a matter of time before that recovery comes along and the market hits another new high.
