Bank of America‘s sell-side indicator is signaling extreme bearishness. It tracks the average allocation to stocks among sell-side strategists, so lower figures correlate with pessimism on Wall Street. The indicator fell 22 basis points to 52.5% in May, well below the 15-year average of 54.8%.
That certainly sounds bad, but it actually bodes well for investors. Historically, the S&P 500 (SNPINDEX: ^GSPC) has produced a positive one-year return 94% of the time when the indicator dropped to 52.5% or lower, and the median return during those instances was 21%. In short, history says the S&P 500 could soar 21% over the next year.
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One logical way for investors to capitalize on that trend is to buy an S&P 500 index fund.
An S&P 500 index fund can add to diversity to any portfolio
The Vanguard S&P 500 ETF (NYSEMKT: VOO) is one of several good S&P 500 index funds. It tracks 500 of the largest U.S. companies, enabling investors to spread capital across value stocks and growth stocks that span all 11 market sectors. The ETF also has a below-average expense ratio of 0.03%, meaning the annual fees on a $50,000 investment would total just $15.
An S&P 500 index fund is a great way for investors to diversify their portfolios and lighten their workload. Buying individual stocks is a serious time commitment. Investors must understand a business inside and out before they consider buying shares, and they need to revisit their investment thesis on a regular basis. That means studying financial filings and keeping up with current events.
Some people find those activities enjoyable (including yours truly), but other people would prefer to spend as little time as possible managing their investments. The Vanguard S&P 500 ETF is a great option for those individuals. It offers instant diversity across hundreds of blue chip American businesses like Apple, Amazon, and Microsoft. Of course, investors can also use an S&P 500 index fund to supplement a portfolio of individual stocks.
Personally, I follow many companies in the technology, consumer discretionary, and communications sectors, and a few in the industrials, financials, and energy sectors. But I have limited exposure to the other five sectors. So I keep about one-quarter of my portfolio in the Vanguard S&P 500 ETF. Doing so diversifies my wealth into sectors I follow less closely (or not at all). It also helps me sleep at night because I know the S&P 500 has been a reliable investment over long periods of time.
The S&P 500 has been a surefire investment since its inception
The S&P 500 was created in March 1957, and the index has produced a positive return over every rolling 20-year period since its inception. That means any investor that held an S&P 500 index fund for at least two decades during that time definitely turned a profit, and there is no reason to think that trend will change. Of course, nothing is guaranteed where the stock market is concerned, but the S&P 500 is a proven moneymaker.
The S&P 500 soared 220% (or 12.3% annually) over the last decade. At that pace, $150 invested weekly in an S&P 500 index fund would be worth $1 million after 25 years and nearly $2 million after 30 years. That said, the S&P 500 has returned closer to 10% annually over longer periods of time, but that would still turn $150 per week into $1.3 million over the course of 30 years.
Here’s the bottom line: Most investors would do well to consistently buy an S&P 500 index — in fact, Warren Buffett has often recommended that strategy — but now is a particularly good time to invest, because history says the S&P 500 could soar during the next 12 months.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Bank of America is an advertising partner of The Ascent, a Motley Fool company. Trevor Jennewine has positions in Amazon.com and Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Amazon.com, Apple, Bank of America, Microsoft, and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.