Warren Buffett and Mutual Funds

A mutual fund is defined as a pool of money set aside by investors, companies, and other organizations. Fund managers invest the cash in various ways, depending on the type of fund. A fixed-income fund term growth manager has to provide gains. Long-term growth managers, on the other hand, must attempt to beat the Dow Jones Industrial Average or the S&P 500. Closed-end funds do not redeem or get new shares because they trade at the net asset value. Other mutual funds are open-end funds, which reflect the net asset value per share of the fund’s underlying investments since shares are created or destroyed as needed.

Years after the 2005 annual shareholders report, Buffett bet $500,000 on a prediction that active investment management would underperform the results of simple buy-and-hold investing over long periods of time. Buffett chose a series of at least 5 hedge funds, betting that no investment professional could choose a set of at least five hedge funds that would beat the low-cost S&P Index fund Buffett would choose over a 10-year period. Buffett selected a charity to receive the $500,000. 5 funds-of-funds represented hundreds of individual hedge funds, seeing that 60% of funds went to management fees.

If you invest $100,00, your expenses will be $50, which means you need to track your investment on the S&P 500. 401ks are a passive investment situation as well, one that makes sense if you work for a company that provides this option. In 2007, Buffett had made another $1 million bet against Protégé Partners that hedge funds would not outperform the S&P index fund, which he won. His advice is to invest in blue-chip stocks, from large, well-funded companies that have been around a long time who have a track record of consistent success.

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