Nobody really knows what the stock market might do in 2025. The current bull market is getting long in the tooth, but these upswings do tend to stick around for several years. The market as a whole looks overvalued, suggesting that a price correction might be coming soon. At the same time, master investor Warren Buffett is buying stocks again after keeping cash on the sidelines for most of 2024. So the next year could keep the bull run going, or swing lower for a while, or perhaps do the Macarena with wild swings in every direction.
So the market's near-term future is as unpredictable as always. But one thing is as sure as sunburns in Florida: markets gain value in the long run. It's fun to pick individual stocks, but safer to stick with a diversified index fund. Here are three reasons why every long-term investor should have a broad market- tracker in their portfolio.
Reason 1: Predictable long-term index returns
Sure, you'll see deep market dips every now and then. The dot-com bubble popped more than 20 years ago. The overheated housing market ran into the subprime mortgage meltdown in 2008. Each market disaster spells the end of many businesses and their stocks may go to zero.
But despite pandemics, the oil crisis of the 1970s, and other painful market crunches, the market as a whole always gets back on its feet and eventually sets new records.
So if you found a way to invest $3,000 in the S&P 500(SNPINDEX: ^GSPC) market index at the start of 1950, you'd have more than $1,000,000 today, passing through a plethora of recessions along the way:
Reason 2: ETFs make it easy to "invest in the stock market"
Exchange-traded funds (ETFs) weren't a thing in the 1950s, and the first index-tracking mutual fund didn't come along until the mid-1970s. These days, several ETFs can help you invest directly in the S&P 500 index.
My favorite among them is the Vanguard S&P 500 ETF(NYSEMKT: VOO). I admit that the older SPDR S&P 500 ETF Trust(NYSEMKT: SPY) and iShares Core S&P 500 ETF(NYSEMKT: IVV) will deliver almost identical results, but the Vanguard fund is my personal preference. This particular ETF is backed by the legendary low-cost culture of Vanguard founder John Bogle, which gives it a fraction of a hair of an advantage over the others in my eyes.
As expected, the Vanguard fund mirrors the underlying S&P 500 index's performance in the long run (and on a day-by-day basis). That's true whether you're looking at pure market returns or total returns including gains on reinvested dividends:
Reason 3: There is no "bad time" to get started with index funds
As noted earlier, short-term market dips will come and go but the whole economy keeps growing in the long run anyway.
Therefore, you really can't go wrong with long-term market investments. Let's say you had $3,000 to invest at the end of 2007. One of the most disastrous market meltdowns was about to take place, but that's my 20/20 hindsight talking. What could that cash have done for you at this far-from-optimal time to invest in the stock market?
If you stuffed that cash in a pillowcase for long-term storage, you'd still have $3,000 in 2025.
Let's imagine you found a world-class savings account with a steady interest rate of 5% per year. This account with unicorn-grade interest rates would have grown to $6,876 by now.
The S&P 500 crashed 54% lower in the next 15 months. If you just held on to your ETF shares through that dark period, you'd have amassed $12,020 by now. The total return soars to $16,870 with reinvested dividends:
Of course, you could have boosted your returns by investing more money along the way, especially when stocks were cheaper. That doesn't change my point, though: Staying invested in the stock market with a safe market tracker like the Vanguard S&P 500 ETF is the closest thing to guaranteed wealth-building growth you will ever find.
So wherever you may think the market will go in 2025, you could start building a portfolio with a few shares of the Vanguard index fund right now. Getting started in the stock market will probably be the best financial decision of your life, regardless of the potholes and speed bumps in the road ahead.
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Anders Bylund has positions in Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
