Warren Buffett Tells How to Invest $1 Million

Here's what Warren Buffett said when asked where a person should invest his first $1 million:

"I’d put it all in a low-cost index fund that tracks the S&P 500 and get back to work…”

Later, Buffett and Charlie Munger added the following:

• “…Put it all in a low-cost index fund like a Vanguard 500.”

• “Professionals take croupier profits out of the system. No one will give you this advice [index funds] because no one gets paid for it.”

I've got nothing to add. ;-)

Comments

[jim]

this sounds good for the long term 5-10 years. how about bringing income in now. i saw the 10 best home work plans on a different email. and anyone about the forex investing plan ?? is that legimate?? thanks,jim

[Mark]

I've been doing this in my 401k for nearly seven years now, and it works just fine. My expectation is at minimum, an 8% return/yr before and after retirement. I will admit that I do sell large chunks (25%) of my holdings when the S&P is up 25-30 points on a day, then buy them back when the market retracts the next day, even when it only drops 10 points. Vice-versa, I buy on down days when the market panics. Sometimes I get out too soon, or get back in too early, but I have managed to consistently beat the S&P by 2-3% every year by trading a few times a month. I don't consider that market timing, do you? I hate picking mutual funds and stocks, so it's an easy choice for me.

Warren recently cautioned everyone that returns in the stock market are going to be closer to 6% per year for the coming decade, so I'm feeling pretty good. I won't get greedy and expect more than 8% per year though.

[jim,]

mark,do you move in and out of an index fund, like vanguard 500?? it sounds like you may move in and out a couple of times in a week Is that correct??

[JK]

Notice it says "first million"...

Would he have given the same answer if it was $1 billion?

I think probably not...

[FMF]

JK --

Not many people have $1 billion to invest.

Not many have $1 million to invest either, but it's waaaaay more than the number that have $1B.

[Mark]

Jim: My 401k has a "Large Cap Stock Index" fund that is no-load Merril Lynch equivalent to the S&P500. If I'm not in that fund, I'm parking my money in the Stable Fixed Income Fund, a cash fund that pays about 5.5% APR. If there are no big swings in the S&P, I may not do anything for weeks. Even if I get caught on the downslope, I may trade if the market swings to the upside more than 2% in a day, which just pares my losses. 80% of the time, huge upswings in the index are followed by profit-taking the next day. I also follow the 3-month slow stochastic to determine broad over-sold or over-bought conditions, but usually there are macroeconomic and geopolitical gyrations that force my hand a few times a month.

[rwh]

I don't have anything to add either, except I don't particularly like that get back to work part:)

[Trent D.]

JK -

You must not have had much Warren Buffett exposure - his advice would be the same for the second million, the third million, the fourth million...

Warren Buffett is my financial hero.

[Trent D.]

I think the "...and get back to work." part was the best part of Buffett's advice here. Nobody ever made it and kept it without continuing to work for it.

[Early Retirement Extreme]

If the first million was made by working rather than investing, the person is probably good at his work. If he has to ask, he's probably bad at investing.

The get back to work part is crucial in this scenario!

One could plonk down a million in an index and see it go nowhere for decades (like the decade that just happened 1998-2008). Getting back to work allows for some dollar cost averaging. This mentally turns the stock market into a savings account rather than an investment (It's like saving up in another (hopefully superior) currency denominated in stocks). And this is not a bad idea for those unable to invest on their own.

One has to spend a great deal of time searching out the few (15% or so) managers that can soundly handle investing OPM (other people's money) (also pronounced opium).

[JC]

That trading around the S&P daily volatility thing is a really really bad idea for a whole host of reasons... Bottom line: it doesn't work and if you think you're coming out ahead, you're probably doing the math wrong. Consistently beating the S&P500 by just casually trading by the seat of your pants off a 3 month slow stochastic is laughable. If you can really generate alpha like that you should be running a hedge fund. Read Malkiel. Cheers,

JC

[Mike Hunt]

I read the Warren Buffett letters. He said if you look at the rate of return from 1900 - 2000 and applied that going forward then the DJIA would be about 2 million by the end of 2100. Interestingly enough it's 2008 and the DJIA is about the same as it was in 2000 or a 0% rate of return!!! So you would have been sitting on dead money the last 8 years. Actually it's worse because of inflation cutting down the purchasing value of your $$$. I like Buffett's idea of investing in a few companies you know really well. I'm trying this with mixed results honestly. The recent run down in the market has stung quite a bit!

So now I'm left with Warren's first rule- don't lose money!

-Mike

[SS]

Down to half a million now.

[anon]

I wonder whom he thinks should invest in Berkshiere Hathaway then?

[HTIM]

Good question, Pop. I agree with you regarding 401ks; most data I've seen indicate that those investors just set it and forget it, and don't do a lot of trading in those accounts.

But if you look at new cash coming into mutual funds -- in taxable and tax-deferred accounts -- you can clearly see performance chasing, as investors try to hop aboard whatever has been hot recently.