Warren Buffet is somewhat of a legend in the investing world. He still lives in the same house he bought in 1957. He is giving away 99% of his $75.6 billion net worth to charity. He also uses his fame and wealth to promote progressive causes that often fly in the face of most investor’s beliefs.
Many investors trust Buffett’s opinion and outlook on the stock market, and for very good reasons. Buffett made his billions by buying stocks and private companies that he felt were severely undervalued, later increasing their value over time by making sound financial decisions. That’s why his Berkshire Hathaway holding company is worth nearly half a trillion dollars, with shares selling for $255,795 each as of this writing.
Recently, Buffett delivered his yearly Berkshire Hathaway letter with some sage advice for all investors. In his litter, Buffett suggested which types of securities people should invest in right now, while also cautioning against falling for lucrative yet costly investments. While these investments aren’t as appealing as, say, trending tech stocks or anything Trump mentions on Twitter, they’re certainly helping investors in the current market…and could help your portfolio, too.
Warren Buffett says all investors should invest in low-cost index funds or exchange-traded funds (ETFs).
“Both large and small investors should stick with low-cost index funds,” according to Buffett’s recently letter to Berkshire Hathaway investors. He reasons that this is due to the low fees incurred from investing in them when compared to mutual funds or hedge funds. Actively managed mutual funds command 1% in fees per year, while hedge funds take a bigger percentage along with a percentage of all profits.
By avoiding mutual funds and hedge funds, you avoid big risks and big fees.
The more you save in fees, the more you can invest. Passively managed ETFs generally have fees totaling less than 1%, making them more attractive than more expensive funds. They’re also more liquid, meaning it’s easier to convert your shares into cash. Best of all, they’re less risky than investing in mutual or hedge funds.
Years ago, Buffett bet that no investor could pick five hedge funds that match the performance of S&P-following index funds.
He bet $500,000 to any investor who could find five index funds that outperformed $SPY and other S&P 500 index funds/ETFs over the course of ten years. Since then, the S&P 500 and related index funds saw better returns than leading hedge funds. This means that putting your money into an index fund or ETF would see less fees and better returns than putting your money with a high cost/high fee hedge fund.
How can you invest in ETFs? Many investors buy $SPY or $VOO as a safe investment. This is because the market historically increases over time, and the current stock market has hit record highs in the last couple of months. (For reference, I personally have most of my money invested in ETFs like $SPYX.)
These aren’t the only ETFs, however. There’s an ETF for everything, whether you’re interested in investing in the retail market, LGBTQ rights, or clean energy, just to name a few options. You can buy these funds directly through your broker or brokerage, and sell them whenever you want.
The point of owning these ETFs, however, is not to make a quick buck and sell them within a week or two. If you do your research and hold on to these funds for many years, you could see yourself retiring earlier than expected.