Do you follow Warren Buffett? Then buy index mutual funds

I was browsing through Warren Buffett’s Chairman’s Letter, in the latest Berkshire Hathaway annual report. He talked about how he and his partner, Charlie Munger, try to suss out a business’s likely future earnings.  If you’re trying to follow his method, however, he doubts you can do it unless you’ve made a study of business prospects a priority in your life.

But don’t be discouraged, he writes. “The typical investor doesn’t need this skill. In aggregate, American business has done wonderfully over time and will continue to do so (though, most assuredly in unpredictable fits and starts). . . . The goal of the non-professional should not be to pick winners — neither he nor his “helpers” can do that — but should rather be to own a cross section of businesses that in aggregate are bound to do well. A low-cost S&P index fund will achieve this goal.”

What more, Buffet writes that he has put his money where his mouth is. “My advice to the trustee [of the money he's leaving to his wife] could not be more simple. Put 10 percent of the cash in short-term government bonds and 90 percent in a very low-cost S&P 500 index fund. (I suggest Vanguard’s). 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.”

Are you a BuffetHead, always trying to pick value stock on his advice? Give it up! Pick an index fund instead.


Tags: , ,

Ben // 04/09/2014 at 5:28 pm

I dislike anecdotal evidence, especially when it begins with “I’m friends with people who do it this way”, but here goes anyway: I’ve got quite a few friends in the investment world, in various roles, and I’ve interrogated all of them about their personal investments; and for equities, not a single one of them invests in anything other than passive index funds. Some overweight S&P 500, some overweight small cap, but it’s index mutual funds or ETFs all the way. One is left to wonder: if bankers and themselves don’t buy actively managed funds, who is left to buy these financial products but people who aren’t informed and don’t know better? And who is left to sell those funds to the ill-informed, except those willing to take advantage of their ignorance?

Jane // 05/01/2014 at 3:29 pm

I’ve found that the economists and academic experts I speak with also buy index funds and ETFs. What would keep Wall St going if it couldn’t sell the dream of beating the market to the folks? Sigh.

John M // 05/27/2014 at 9:33 am

Index funds have been shown over and over again to beat almost all actively managed funds over any meaningful period of time, and the longer the time period the more index funds win out. At this point, it is tantamount to financial malpractice to recommend trying to beat the market by investing in funds that try to pick winners and time markets. If this message could cut through all of the financial noise blasted at people on tv and the internet we could save millions of people a lot of grief.

Leave a Reply

To prove you're a person (not a spam script), type the security word shown in the picture. Click on the picture to hear an audio file of the word.
Anti-spam image

Have Jane Speak

"In the five years I have been with the organization, I have never before seen the audience give any speaker a standing ovation." — Ceramic Tile
Distributors Association
learn more

Jane’s Book Club

The Number by Lee Eisenberg

THE book to read, when you’re puzzling over how much to save for retirement.

Past book recommendations

Jane’s Bio

Jane Bryant Quinn is a nationally known commentator on personal finance, with books and columns read and trusted by millions.
learn more