Buffett's Other Big Investment Secret
. . . unless you want to speculate, and then you should not listen to an advisor.
Read more below!
"So that’s why Buffett’s recent reference to a bet with the money management firm Protege Partners struck a chord with me. The Oracle ORCL +0.91% of Omaha bet the firm $1 million that a plain-vanilla stock index fund like the Vanguard S&P 500 Index fund (Admiral Shares) will beat most hedge funds over a decade beginning in 2008.
Buffett’s been spot on to date, with the Vanguard fund up nearly 66% over the past eight years compared to about 22% for a basket of hedge funds. Although the contest has two years to run, the boring, passive basket of the biggest U.S. stocks has built up a big lead and its performance is triple that of the active managers with the big fees.
What Buffet didn’t say — but should be mentioned to millions of average investors who need to know — is that a passive index fund is not only avoiding many of the sins of active management, it’s incredibly cost efficient."
This is a suckers bet. It has been widely know for a very long time that index funds outperform managed funds over time.
"Let’s look at Buffett’s suggested dull-as-wallpaper stock index fund. It charges you .05% annually for holding 500 stocks. You get a basket of stocks that include big names like Apple AAPL +3.71%, Alphabet and General Electric — and Buffett’s Berkshire Hathaway — all in one package. It’s cheap, diversified and not traded. You also get the dividends from these companies.
As if Buffett’s blessing and the bargain-basement virtues of index funds weren’t enough to compel you to invest in them, there’s more. A recent study by Morningstar found that low-cost funds have a better chance of succeeding in the future than high-cost funds, according to Russell Kinnel, one of their top analysts:
”While we think it makes sense to consider a variety of factors when choosing funds, our research continues to find that fund fees are a strong and dependable predictor of future success,” Kinnel said.
“We found that the cheapest funds were at least two to three times more likely to succeed than the priciest funds."
It is not hard to see how a fund charging 0.05% would beat a fund charging 2% and taking 20% of the profit. What is difficult to understand is why people find this difficult to understand.
All of the larger investment groups have funds available in the index category. The real question becomes do you invest in a total stock market index fund, an S&P 500 index fund, a top 1000 stock index fund, a small cap index fund, a mid cap index fund, an MSCI EAFE index fund, or some combination?
While I will leave you to decide this, Maddog prefers simple and tends to invest the bulk of retirement and Health Savings account monies into a total stock market index fund (70%), and an MSCI EAFE index fund (30%). Pay yourself first out of every check, and invest in according to your model. After a few years you are likely to be pleasantly surprised at your tidy nest egg.
Don't take my word.
"In the past, Buffett has been a vocal proponent of index funds for the vast majority of investors. They should be staples in your retirement and other investment portfolios. It’s not just sage advice. The compelling math alone will put a lot more money in your pocket."
Equity Index Funds: Schwab Brokerage: Index Funds