When it comes to the investing industry, Warren Buffett is king. He’s managed to produce the best returns out of any investor in history, while doing so from the comfort of his home in Omaha, Nebraska, not on Wall Street.
That’s precisely the reason why many people seek his retirement investment advice. They want advice from somebody who is just like them – a guy that doesn’t spend all day and night in Manhattan’s financial district.
WWBD: What Would Buffett Do?
During a Berkshire Hathaway shareholder meeting in 2004, one investor asked Mr. Buffett whether he should hire a broker; invest in an index fund or buy Berkshire Hathaway shares.
In typical Warren Buffett fashion, he had this to say:
“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.”
Really? An index fund? Did the world’s best stock picker really just recommend that?
This isn’t even the first time he’s answered this question in such a simple way. During another one of his question-and-answer sessions, Buffett’s stance was made quite clear:
“If you like spending 6 to 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.”
Now we will look at some of the specifics, like Warren Buffett’s favorite index fund:
“Just pick a broad index like in the S&P 500. 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 Warren Buffett so set on index funds? They’re cheap, for starters. As a matter of fact, Vanguard’s S&P 500 ETF gives investors the opportunity to own a piece of 500 of the largest companies traded on the public stock markets, and this includes Berkshire Hathaway, and the cost is only 0.05% per year.
For an investment worth $100,000, the yearly fees would only cost $50. You can compare this to the average large-cap mutual fund fee of $1310.
Over a period of time, the lower expenses and fees will help your money grow faster.
The Big Mistake You Should Avoid
Buffett is happy to help people avoid making big mistakes. He’s also happy to help investors make smart decisions. When speaking as simply as possible, Buffett mentioned how cash is one of the worst investments that anyone 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.”
But Buffett isn’t trying to say that having a cash buffer in case of an emergency is the wrong thing. But hanging onto large piles of cash – meaning tens of thousands of dollars in cash – is an excellent way to ensure that you make a terrible return on all of that money.