Warren Buffett Loves Index Funds. Should You Feel the Same Way?
Even the most casual investor knows Warren Buffett. He's a brilliant thinker. One of history's great business magnates. The most successful investor of the 20th Century.
And he loves low-cost index funds.
With a C.V. like that, it's little wonder Buffett's pronouncements are given tremendous weight. Yet his prescriptions for wealth building are far from complex. He believes in the basics.
A few years ago, Buffett made a wager with some money managers at Protégé Partners. A market performance challenge. A $1 million bet with the winnings going to charity.
Buffett picked an index fund. The money pros picked a group of hedge funds.
Seven years later, Buffett's Vanguard S&P 500 Index Fund is up 63-percent, according to CNBC.
The hedge funds? A paltry by comparison 19-percent.
Hey, nobody said beating the best investor of the last 100 years is easy.
The value of simplicity
Building wealth is simple. Yet it's never been easy. It doesn't take exotic investment schemes or esoteric formulas.
It takes discipline -- and unceasing application of a few fundamental tactics.
That's bad news for some people. Many of us would rather stumble upon an easy path to prosperity. Yet it doesn't work that way.
Buffett's somewhat routine financial advice is proof positive of this notion. He always stresses the tried and true -- companies like Coca-Cola. He loves value stock and index funds.
Though he seems sharp as ever, even Warren Buffett isn't immune to age. Now in his mid-80s, the Oracle of Omaha has urged his heirs to convert his estate into low-cost index funds.
Why? For several reasons. Buffett believes the fees and costs associated with investing aren't worth the expense. A low-cost index fund bumps up your return simply by eliminating added costs.
Buffett also believes the return on these funds will outpace those offered by a money manager. Skeptical? You shouldn't be. Professionals struggle to beat the market. And you can look no further than Buffett's own $1 million bet for evidence of his wisdom.
Spreading the index fund message
This appreciation for index funds is nothing new. It's certainly not like Buffett's been keeping it quiet, either. Around a month ago, basketball star LeBron James appeared on CNBC with Buffett. When James asked for advice about what to do with his hundreds of millions, Buffett didn't pick stocks.
He didn't say "buy gold."
He didn't encourage him to buy real estate.
He said the same thing he always says -- invest in index funds, adding that "sometimes the simplest is best."
We often hear stories in the media about athletes losing millions. It's always a real estate deal gone bad. Or a string of restaurants. Or an Enron-style stock catastrophe.
It's never index funds.
Buffett says to look at it in a broader context. An index fund is like buying a farm, or a piece of your country. Over a few decades, it's virtually guaranteed to go up. You really can't lose.
Unless you opt for the quick fix. The "too good to be true" opportunity. The "once in a lifetime" investment.
You don't have to appeal to the authority of Warren Buffett to see those are fool's errands.
Now, Buffett has come under some criticism for not always following his own advice. And it's true -- he's not parking everything he has in a low-cost index fund. So there is a bit of "do as I say, not as I do" going on here.
Yet that's entirely OK. It actually makes perfect sense. Warren Buffett never claimed to be the average investor. He has almost limitless resources. He has access to the best information. He has incredible talent. He's as shrewd as they come.
He's the best investor of the last century.
So why would he follow advice meant for the average investor? He'd be negligent to do so.
So unless you have the talent and resources of Buffett -- you don't want to do what he does.
You want to listen to what he says.
And what he says is simple: Invest in low-cost index funds. Bet on the broader U.S. economy. Minimize fees.
It's the closest thing we have to a recipe for guaranteed wealth.
Anyone who fails to take advantage has only himself to blame.