Warren Buffet is a popular name in the finance market. The world’s fourth-richest man is known for his valuable investment suggestions. He is better known as the best investor in the world. That is why many investors look up to him and pay heed to all his advice. If you are also looking for some great investment advice from the man himself, then here’s a straightforward suggestion- ‘index funds’.
Yes, neither valuations, ratios, or anything dealing with cash flow; Warren Buffet says buying index funds is the best and simplest deal for every investor. He acknowledges the fact that not everybody is suitable for individual stock pricing. Instead, he states that most investors would be better off buying index funds rather than single stocks.
To claim his point, Buffet even wrote in his 2016 Berkshire Hathaway annual shareholder letter that “My regular recommendation has been a low-cost S&P 500 index fund.” We’ll discuss his investment advice and tell you more about its advantages in this post. So, read on!
More About Warren Buffet’s Recommendation- Index Funds
Warren has always been an open book when it comes to sharing his strategy and advice. He is a true believer of patience, discipline, and risk aversion and which made him the best investor of all time. He recommends index funds as he believes everyone from newcomers to expert investors can maintain them easily.
An index fund is identical to an exchange-traded fund and mutual fund. The fund basically tracks and mimics an underlying index. It is different from stocks and other actively managed funds as the case of index funds; you have to move along the market instead of beating it.
Index funds allow investors to invest their money without spending considerable hours in researching each company and their backgrounds. Nevertheless, index funds would be a better option for those who want to grow their wealth.
Index funds may sound daunting, but they’re nothing but a collection of stocks representing an extensive market. When it comes to an S&P 500 index fund, you’re buying a small piece of the 500 largest publicly traded US companies. It would significantly minimize your risk. The bottom line is that there’s no individual stock pricing or market timing involved; the fund simply tracks the stock index’s performance.
Warren Buffet Claims Index Funds are the Most Sensible Equity Investment
The first index mutual fund was initiated by the founder of Vanguard, Jack Bogle, and his main aim was to shut criticism. Later, he found that index funds are incredibly money-making funds that allow investment firms to act efficiently.
Guess what? Vanguard is now one of the world’s largest investment funds and is currently managing about $6.2 trillion in global assets, as of January 31, 2020. And, that’s why Buffett admires it.
“ A low-cost index fund is the most sensible equity investment for the great majority of investors,” Buffett told Bogle in his book “The Little Book of Common Sense Investing.”
He even added a statement that “By periodically investing in an index fund, the know-nothing investor can actually out-perform most investment professionals”.
If the passive management option of investment sounds like something you would like to invest in, you have two choices: Index funds or exchange-traded funds (ETFs). Be it Fidelity, Vanguard, Charles Schwab, or any other financial player. You can buy index funds with minimum risks from any of them. The most common and best way to invest in index funds is directly through a fund provider.
ETFs can be bought and sold on a stock exchange. So, if you want to invest in ETFs, you can do it through a broker, brokerage platform, or Wealthface.
Wealthface offers you a diversified portfolio of ETFs with pre-set proportions of equities, fixed income, real estate, and commodities that will be rebalanced every quarter by top-performing global ETFs.
No matter what payment method you choose, you don’t need to break your bank to start with index funds.
Buffett also recommends that investing in small amounts gradually over a long period would be beneficial for long-term investors. . It is called dollar-cost averaging.
Always Start Your Index Funds at Low Cost: Warren Buffet
At the annual shareholder’s meeting in 2002, Buffet vouched on Vanguard index funds. He said that Vanguard funds are the best bet as they are the least expensive.
“If I were going to put money into an index fund in relatively equal amounts over a 20 or 30-year period, I would pick a fund — and I know Vanguard has very low costs. I’m sure there are a whole bunch of others that do. I just haven’t looked at the field. ”
“But I would be very careful about the costs involved,” he added, “because all they’re doing for you is buying that index. I think that the people who buy those index funds, on average, will get better results than the people that buy funds that have higher costs attached to them, because it’s just a matter of math.”
Here, Buffett is pointing out to a fund’s expense ratio or the costs you pay to fund providers or brokers to properly manage your investments. It is expressed as a small percentage of your bank balance and is advertised on each fund. But it is absent in the case of index funds.
Let’s take an example to understand.
If you invest with a 0.50% expense ratio, then you need to pay $5 for every $1,000 to your broker for every $1,000 of your total account balance annually.
Unlike other kinds of funds, index funds make investing financially feasible to the masses because they are passive and don’t require specific assistance from fund managers
In today’s tech-driven world, three of the biggest index fund providers are Vanguard, Fidelity, and Schwab which generally charge around 0.10% only.
Slow and Steady- The Path to Success
Buffett’s advice for buying index funds was a highly-valuable tip for every investor, irrespective of their experience. It would be exciting to see his viewpoints on dollar-cost averaging.
Why is it the right course of action? It is simply because it is impossible to predict what’s going to happen on the market, and investors shouldn’t even try to foresee the future. Instead, they should gradually invest their wealth and try to make the most out of it over a long period.
Growing slowly and steadily is the success mantra for every investor.
If you have a lump sum to invest, you may find it difficult to gather and give all your wealth at once. So, it is recommended to invest bits by bits.
Buffet even mentioned that an individual must be aware of his doings and not overpay in fees, especially with index funds. He recommends the S&P 500 index funds.
As per the saying by Buffet, it could be easily figured out that he believes that staying within limits or circle of comfort would be beneficial for every investor out there.
In a nutshell, he has advocated that index funds are the best kind of investment for many years to come. So, it would be a wise move to follow the path shown by the world’s best investor. Get ready to expand your portfolio by buying index funds!