One person tells you to invest in an S&P 500 Index Fund, another person tells you how much money they’ve earned with Bitcoin, yet another has a hot stock tip from their brother-in-law… Who should you listen to?
Who indeed….
There are quite a number of personal finance experts recommending broad-based low-fee index funds like the S&P 500, or Vanguard’s famous Vanguard Total Stock Market Index Fund (VTSAX). Let’s hear from a few of these experts.
Let’s start with…. WARREN BUFFETT
In his 2016 letter to Berkshire Hathaway shareholders, Warren Buffett explained:
Over the years, I’ve often been asked for investment advice, and in the process of answering I’ve learned a good deal about human behavior. My regular recommendation has been a low-cost S&P 500 index fund. To their credit, my friends who possess only modest means have usually followed my suggestion. I believe, however, that none of the mega-rich individuals, institutions or pension funds has followed that same advice when I’ve given it to them. Instead, these investors politely thank me for my thoughts and depart to listen to the siren song of a high-fee manager or, in the case of many institutions, to seek out another breed of hyper-helper called a consultant.
That professional, however, faces a problem. Can you imagine an investment consultant telling clients, year after year, to keep adding to an index fund replicating the S&P 500? That would be career suicide. Large fees flow to these hyper-helpers, however, if they recommend small managerial shifts every year or so. That advice is delivered in esoteric gibberish that explains why fashionable investment “styles” or current economic trends make the shift appropriate. The wealthy are accustomed to feeling that it is their lot in life to get the best food, schooling, entertainment, housing, plastic surgery, sports ticket, you name it. Their money, they feel, should buy them something superior compared to what the masses receive. In many aspects of life, indeed, wealth does command top-grade products or services. For that reason, the financial “elites”—wealthy individuals, pension funds, college endowments and the like—have great trouble meekly signing up for a financial product or service that is available as well to people investing only a few thousand dollars. This reluctance of the rich normally prevails even though the product at issue is—on an expectancy basis—clearly the best choice. My calculation, admittedly very rough, is that the search by the elite for superior investment advice has caused it, in aggregate, to waste more than $100 billion over the past decade. . . . Human behavior won’t change. Wealthy individuals, pension funds, endowments and the like will continue to feel they deserve something “extra” in investment advice. Those advisors who cleverly play to this expectation will get very rich. This year the magic potion may be hedge funds, next year something else. The likely result from this parade of promises is predicted in an adage: “When a person with money meets a person with experience, the one with experience ends up with the money and the one with money leaves with experience.”
JL Collins Says
The great irony of investing is the more you watch and fiddle with your holdings the less well you are likely to do. Fill your basket, add as you go along and ignore it the rest of the time. You’ll likely wake up rich.
Here’s the basket: VTSAX. No surprise here if you’ve been reading along in this series so far. Stock Index Fund. Low cost so almost all our money is working for us.
Owning 100% stocks like this is considered “very aggressive.” It is and you should be. You have decades ahead. Market ups and downs don’t matter ‘cause you avoid panic and stay the course. If anything, you recognize them as the “stocks on sale” buying opportunities they are. Perhaps 40 years from now you might want to add a Bond Index Fund to smooth out the ups and downs. Worry about that 40 years from now.