Warren Buffett and Charlie Munger answered the question, "Why I suggest my wife invest in the S&P 500, not Berkshire Hathaway," at the 2017 Berkshire Hathaway Annual Meeting. Here is the main reason from these two investment masters:
- Longevity of Investment: The S&P 500 is viewed as a stable, long-term investment that is challenging to outperform, offering consistent returns without the need for active management while providing safeguards against market volatility. It comprises 500 leading companies and offers a diversified, reliable investment based on its competitive selection mechanism.
Incredible bullish trend of S&P 500(US Stock)
Observed from the history of the S&P 500 logarithmic chart, the trend of the S&P 500 index is bullish. Even though there have been some drops in its history, the index has always bounced back.
The long-term stable growth makes it a favorable investment choice. The high compounded annual growth rate (CAGR) distinguishes the S&P 500 as one of the best investment vehicles in the legendary story of the US stock market.
Approximately, the average annual return of the S&P 500 is 10%. With this average annual return, the profit from long-term investing is incredible. While the number 10% may not seem attractive at first, when compounded over the years, the money grows significantly.
Return of S&P 500 in 30 years
Let's see how 10% could make wealth, here are the conditions:
- Initial amount: 10k
- Monthly additional amount: 1k
- Years to growth: 30 years
- Rate of return: 10%
what will be the final balance?
The final balance: 2.4 millions dollar
For a 30-year investment, the total investment amount is only $46,000, but we make $2.4 million at the end. By leveraging the magic of compounding with the long-term stable growth of the S&P 500, we achieve a 5,300% return. (Tool for calculate investment growth)
Factors make the bullish US stock history
The US financial system is marked by high liquidity, strong financing capabilities, and strict regulations, with the US dollar serving as the primary medium for international trade. Demand for US assets continues to rise.
Increasing foreign investment demand on US assets
Since the 21st century, overseas holdings of U.S. securities have been steadily increasing, with a significant jump observed before 2022, prior to the Federal Reserve's interest rate hikes.
The shrink supply of US stock market
Since 2007, or the post-GFC era, the supply in the stock market (including IPOs and secondaries) has totaled $2,681. In comparison, the demand (from buybacks and M&A) sums up to $21,334, resulting in a gap of $19,153. This significant disparity highlights a robust demand for stocks relative to the supply available, indicating strong market interest in corporate assets. The high levels of buybacks and M&A activity suggest that companies are actively seeking to consolidate value, enhance shareholder returns, and capitalize on favorable market conditions. Overall, this trend reflects a dynamic and evolving market landscape where demand consistently outpaces supply.
Over the last 40 years, the disparity between stock market supply and demand has remained significant.
The bullish history of the U.S. stock market is driven by increasing foreign investment in U.S. assets and the shrinking supply of stocks. This ongoing demand, coupled with limited supply, underscores the market's strong performance and resilience.
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