Warren Buffett is widely acknowledged as the world’s best investor.
The Oracle of Omaha, as he is known, produced some of the best returns the world has ever seen, growing the book value of Berkshire Hathaway (NYSE: BRK.A) by 20% per year over a period of 55 years.
What’s different is that Buffett did all of this work from his office in Omaha, and not from a desk on Wall Street, the capital of the US financial industry.
For that reason, many turn to Buffett for his advice on how to invest for retirement.
They want to hear from someone like them, who lives simply and is content without living life in the fast lane.
What would Buffett do?
At 2021’s Berkshire Hathaway shareholders meeting, Buffett was asked by a long time shareholder if he should buy Berkshire or simply invest in an index fund.
Buffett delivered his typical, common-sense rationale:
“I’ve made it public. On my death, there’s a fund for my then-widow, and 90% will go into an S&P 500 index fund, and 10% in treasury bills.”
You can catch a clip of the Oracle’s reply here, courtesy of Yahoo Finance:
The question is, what is an index fund?
And why is the world’s best stock picker in the world suggesting it?
Buying the haystack
For the late John Bogle, the inventor of index funds, picking a good stock is like finding a needle in the haystack.
He would rather own the whole haystack.
Similarly, if you don’t have the time or inclination to pick stocks, then index funds can be a consideration for you.
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.”
But let’s get to the specifics.
The right fund for you
What’s Buffett’s favorite index fund?
“Just pick a broad index like the S&P 500 [a widely-followed Us 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. “
Why is Buffett so keen on index funds, especially those from Vanguard?
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, publicly-listed US companies, including Buffett’s Berkshire Hathaway.
The cost? A mere 0.03% per year.
On a $100,000 investment, fees would tally to only $30 per year on the ETF, compared to an average of $540 for a US mutual fund (equivalent to a unit trust here in Singapore).
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) – come with annual fees of 0.3% each.
This compares favourably to the average stock-based unit-trust here could cost investors as much as 2% or more a year.
Investors should keep an eye on fees.
Over time, these can really do damage to your investment returns.
Get Smart: A worse mistake
As you can tell, Buffett is keen on 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 be worth less over time. But good businesses are going to be worth more over time.”
Of course, we should always keep some emergency cash on hand and avoid using any cash that you need in the next five years.
But if you have excess cash, Buffett’s suggestion is to put it to work.
Having just cash is a great way to guarantee a terrible return as inflation eats away at your spending power.
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Disclosure: Chin Hui Leong owns shares of Berkshire Hathaway.