When it comes to investment, Warren Buffet is considered a true wizard. In his annual letter to the shareholders of Berkshire Hathaway, Warren Buffet claimed to know the secret of the best investment, and included a section on investment fees, stating that they could rob individuals of their profits. However, Warren Buffet’s investment method could counter this, so let us look at his idea and if it is effective for all investors!
The Investment Wager
To prove his point, Warren Buffet wagered that active investment management would under perform compared to buy-and-hold investments over a longer period. He stated this in 2005, and several years later, he even wagered half a million dollars that no investment professional could beat the performance of low-cost S& P 500 index fund of his choosing, compared to a professional investor using five hedge funds. Only one hedge fund manager was brave enough to make the bet.
The wager ends this year and it looks like Warren Buffet is going to win his bet. The S&P index fund has showed a compounded average return of 7.1% each year, which is a total of 85.4% at the end of 2016. This is a big difference with the hedge funds, which only acquired a gain of 22%, almost a fourth of the index fund return. Unless the fund manager gets a miracle from above, the $500,000 bet win will go to the charity Warren Buffer has chosen.
The Benefit of S&P Index Funds
Warren Buffer recommends using S&P Index Funds for investments because he believes they match the market’s performance. When comparing this to hedge funds, investors must consider the cost of actively managed investments, which is certainly the case for hedge funds. Of course, the result of this is that hedge funds usually under perform the market.
To put it in simple terms, Buffet believes that the managers of hedge fund investments make the real money, while investors do not. Since managers charge higher fees, the profits of such investments usually go to the managers instead of the investments. Therefore, low-cost index funds are usually the best investment, no matter how little or how much you can invest.
Among the various index funds available, Warren Buffer recommends the Vanguard S&P 500 ETF. Vanguard S&P 500 ETF is easy to trade and only has an annual management fee of 0.05%. So, if you are looking to invest a total of $100,000, you are only going to pay $50. In conclusion, a great investment for those who do not want to pay fund managers tremendous amounts for little profit.
Stocks Are Not Obsolete
Even though Warren Buffet proved that S&P Index Fund investment could be more beneficial for investors, it does not mean that stock purchases have become obsolete. If you are an investor who has the time to research companies and the funds to invest in them, you could still benefit from stock purchases and sales.
Of course, most investors who do not invest for a living do not have the time to benefit from individual stocks. For those investors, S&P Index Funds could be more beneficial, since it eliminates those considerable fees for fund managers and puts profit directly in the investor’s pocket.