Warren Buffett might as well be king of the investment industry. He produced the best returns the world has ever seen working from his house in Omaha, USA, not a desk on Wall Street, the capital of America’s financial industry. And for that reason, so many people want his advice on how to invest for retirement. They want to hear from someone like them – someone who lives simply and is contented without living the high life. What would Buffett do? At the 2004 Berkshire Hathaway (an American conglomerate and investment-holding company) shareholders meeting, Buffett was asked by…
Warren Buffett might as well be king of the investment industry. He produced the best returns the world has ever seen working from his house in Omaha, USA, not a desk on Wall Street, the capital of America’s financial industry.
And for that reason, so many people want his advice on how to invest for retirement. They want to hear from someone like them – someone who lives simply and is contented without living the high life.
What would Buffett do?
At the 2004 Berkshire Hathaway (an American conglomerate and investment-holding company) shareholders meeting, Buffett was asked by one investor if he should buy Berkshire, invest in an index fund, or hire a broker.
Buffett delivered with his typical, common-sense rationale:
“We never recommend buying or selling Berkshire. Among the various propositions offered to you, if you invested in a very low cost index fund — where you don’t put the money in at one time, but average in over 10 years — you’ll do better than 90% of people who start investing at the same time.”
An index fund (a fund that essentially tracks a market index)? That’s what the best stock picker in the world recommends?
Yes, and it wasn’t the first time he answered with such simplicity. In another question-and-answer session, Buffett made his stance plain and clear:
“If you like spending 6-8 hours per week working on investments, do it. If you don’t, then dollar-cost average into index funds. This accomplishes diversification across assets and time, two very important things.”
So, let’s get to the specifics. What’s Buffett’s favorite index fund?
“Just pick a broad index like the S&P 500 [a widely-followed American stock market index]. Don’t put your money in all at once; do it over a period of time. I recommend John Bogle’s books — any investor in funds should read them. They have all you need to know.
Vanguard. Reliable, low cost. If you’re not professional, you are thus an amateur. [F]orget it and go back to work.”
Why is Buffett so keen on index funds, especially those from Vanguard? They’re cheap. In fact, Vanguard’s S&P 500 ETF – an exchange-traded fund tracking the S&P 500 – provides a way for investors to own a slice of 500 of the largest businesses traded on the public stock markets in America, including Berkshire Hathaway, at a cost of just 0.05% per year.
On a $100,000 investment, fees would tally to only $50 per year on the ETF, compared to $1,310 for the average large-cap mutual fund (equivalent to a unit trust here in Singapore) in the USA.
Here in Singapore, ETFs tracking our local stock market barometer, the Straits Times Index (SGX: ^STI), also come with much lower fees compared to the average actively-managed unit trust. The two ETFs that track the index – the SPDR STI ETF (SGX: ES3) and Nikko AM Singapore STI ETF (SGX: G3B) – comes with annual fees of 0.3% and 0.28% respectively, while the average stock-based unit-trust here would cost investors more than 1.94% a year according to a Morningstar report compiled earlier this year.
Over time, higher fees and expenses can really kill an investor’s returns.
Avoid this big mistake
Buffett’s pretty keen on helping people avoid big mistakes, just as he’s all for helping investors make better decisions. Saying it as simply as he could, he opined on how having cash is one of the worst investments you could ever make:
“The one thing I will tell you is the worst investment you can have is cash. Everybody is talking about cash being king and all that sort of thing. Cash is going to become worth less over time. But good businesses are going to become worth more over time.”
Of course, that’s not to say that having a cash buffer for emergencies is a bad thing. However, having piles of cash — tens upon tens of thousands of dollars in cash — is a great way to guarantee a terrible return on a very large pile of money.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. This article was written by Jordan Wathen and first published on fool.com. It has been edited for fool.sg