Fortune recently ran some investing advice from Warren Buffett. The whole article was quite interesting, but I want to highlight and comment on a couple points he made. Here's the first:
You don't need to be an expert in order to achieve satisfactory investment returns. But if you aren't, you must recognize your limitations and follow a course certain to work reasonably well. Keep things simple and don't swing for the fences. When promised quick profits, respond with a quick "no."
A few thoughts here:
- Thankfully, getting a great (not just "good") return rate, which almost no one can do consistently, is not the major factor in determining investing success. What is? Time invested.
- For most people, a simple, three-fund investment plan will get them a more than adequate return rate.
- If you want to invest in something requiring a bit more expertise, a mentor can get you up to speed very quickly. That's how I was able to get into real estate investing so quickly.
Quote #2:
My money, I should add, is where my mouth is: What I advise here is essentially identical to certain instructions I've laid out in my will. One bequest provides that cash will be delivered to a trustee for my wife's benefit. My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard's. (VFINX)) I believe the trust's long-term results from this policy will be superior to those attained by most investors -- whether pension funds, institutions, or individuals -- who employ high-fee managers.
Ha! Love, love, love this advice and sentiment.
Couldn't agree with him more! I've detailed my thoughts on this issue previously in Why I Invest with Index Funds.
It says something when the best (or at least one of the best) investor in the world recommends index funds for most people, doesn't it?
I still love the "what if you were 30 and had $1M and no time for full time investing" answer he gave of "I’d put it all in a low-cost index fund that tracks the S&P 500 and get back to work".
Even with $1M to invest, its still easier to grow your net worth by working hard and advancing your career than eeking out another percent, even if you can pull it off. Or even just working at all. It struck me when I asked my dad, who was still working a day and a half for his employer of 40 years, if he'd ever retire. Besides giving him something to challenge his mind, He said the 12 hours of work plus his and moms SS was enough to live on and it was nice to not have to even touch his nest egg yet.
I doubt if he was very skilled in investing and spent 12 hrs/week looking at his investments that he could create much more income, but a mere 12 hours performing his career skills completely replaced his need for that entire nest egg altogether.
Posted by: SJ | June 06, 2014 at 07:48 AM
I retired from the USAF in 2002, and then started a second career at a non-profit company. I've tracked my 403(B) performance over the past 12 years, and noted a cummulative rate of return of 6.3%, which is quite a bit lower than what I expected it would be. This includes approximately a 75/25 stock/bond mix, with approximately a 2/1 domestic/foreign mix on the equities, which I thought was moderately aggressive for my age. My 403(B) doesn't allow for an index fund option, but I'm curious if I had VFINX over the same 12 years if it would have beat 6.3% (including the crash of 2008)?
Posted by: Paul | June 06, 2014 at 09:17 AM
@Paul,
Yes, VFINX came out on top of your portfolio with ~7.3%. This is price-only; it'd be even better if we were to consider reinvested cap gains and dividends. I've owned this fund and its variants for over 20y.
Posted by: M20 | June 06, 2014 at 10:49 AM
Paul, 10 years ago VFINX had a price of 103.97. Today it has a price of 179.57. That would give you an annualized return of 5.62%.
Posted by: MechE31 | June 06, 2014 at 10:51 AM
Paul, are you talking about an annualized return or a cumulative return?
M20's 7.3% number is right if you're looking at cumulative return, but 5.62% is correct if you're looking at annualized (meaning each year the return compounds on the previous year's return)
Posted by: MechE31 | June 06, 2014 at 11:22 AM
@Paul
From 6/5/2005 to 6/5/2014 VFINX had a 7.30% annual return.
Posted by: Old Limey | June 06, 2014 at 11:54 AM
In case anyone is interested, Fidelity also has a S&P500 index fund called FUSEX with returns identical to VFINX.
Posted by: Old Limey | June 06, 2014 at 12:33 PM
Fidelity also has a Four in One Index Fund called FFNOX which gets your diversification using index funds.
Spartan 500 Index Fund - Investor Class 48.10%
Spartan Extended Market Index Fund - Investor Class 11.67%
Spartan International Index Fund - Investor Class 25.18%
Spartan U.S. Bond Index Fund - Investor Class 15.03%
Posted by: KT | June 06, 2014 at 12:45 PM
I didn't realize you had a mentor for getting started in real estate investing. How did you find him or her?
Posted by: Danielle | June 06, 2014 at 12:52 PM
SJ says: I doubt if he was very skilled in investing and spent 12 hrs/week looking at his investments that he could create much more income, but a mere 12 hours performing his career skills completely replaced his need for that entire nest egg altogether.
We could draw a healthy retirement now too. But wife and I also work our own businesses a few hours/week. So not only do we not need to touch nest egg, delaying retirement withdrawal increses it 7%/year.
Posted by: www.facebook.com/profile.php?id=1420029454 | June 06, 2014 at 01:02 PM
Danielle --
He was the father of a boy my son played basketball with and we got to know him over several years.
Posted by: FMF | June 06, 2014 at 05:53 PM