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Amid high inflation and rumors of a recession, investing is more confusing than ever. Billionaire guru Warren Buffett has a simple strategy that anyone can try, especially those new to investing. Here’s how it works…
First of all, let’s lay out some facts. Since its inception, the S&P 500, despite ups and downs, has returned 11.28 percent over the long run, Investopedia reports. The key here is to look at the historical returns, not the short-term turbulence.
Indeed, for the past 20 years, investing in low-cost index funds like the S&P 500 has come to dominate much of the investing landscape, CNBC reports.
There are several reasons for this investment strategy, but the most prominent is that by investing in S&P 500, which uses index funds and exchange-traded funds that mimic the index, you don’t pay as much as you would for each stock.
Another big reason is it’s cheaper overall. Certainly less than most mutual funds, plus, there’s far less trading involved – which decreases your cost. Further, the primary structure used to invest in index funds, Exchange Traded Funds (ETFs), also have tax advantages.
An index fund is a type of mutual fund or exchange-traded fund (ETF) with a portfolio constructed to match or track the components of a financial market index, such as the Standard & Poor’s 500 Index (S&P 500), according to Investopedia. It provides broad market exposure, low portfolio turnover, and low cost.
Warren Buffett’s simple strategy that anyone can do is to invest in index funds.
In 2007, Buffett entered into a bet with a money management firm that specializes in hedge funds. Warren believed an index fund could beat an active hedge fund manager. The wager involved testing the performance over a 10-year period commencing on January 1, 2008.
After the test ended on December 31, 2017, the S&P 500 Buffett banked on outperformed a portfolio of five hedge funds when performance was measured on a basis net of fees, costs, and expenses.
The index fund Buffett chose was the Vanguard Index Fund as a proxy for the S&P 500. It not only won – it won by a landslide. The five funds had an average return of only 36.3% net. But the S&P index fund had a return of 125.8%!
Since the S&P 500 has a proven track record, the hardest part for some investors is resisting the urge to jump ship too soon. When there are cycles of ups and downs, some investors always panic and sell during the dip. But again, the S&P 500’s lifetime historical return of 11.82% should be a reminder to hold your cards and see your bet through. That’s how you win.
