Warren Buffett says: Invest in ETFs!

invest in ETFs

Advice From the Master!

When it comes to money and investing, it’s hard to find a more authoritative voice than Warren Buffett. He’s made his name and career out of being the money guy, and he’s back this year – at 86! – to reaffirm a prediction he made ten years ago.

Why does this matter for you? Because smart investing dollars might go somewhere different than you’d expect.


Buffett revisited his 10-year wager that the S&P 500 will outperform a portfolio of funds of hedge funds, net of fees and expenses, between January 1, 2008 and the end of the 2017 calendar year. Why? Because the negative of fees outweighs the positive of investing acumen over time.

Here’s his rationale: “A number of smart people are involved in running hedge funds. But to a great extent their efforts are self-neutralizing, and their IQ will not overcome the costs they impose on investors. Investors, on average and over time, will do better with a low-cost index fund than with a group of funds of funds.”

Buffett’s wager, valued at $500,000 with the proceeds to go to charity if he wins, only managed to attract one investor on the hedge side of the bet. To date, that fund professional’s average gain for five pooled funds is up 2.2% vs. a 7.1% advance for Buffett’s index bet, so there is little chance he’ll lose.

“There are of course,” he added, “some skilled individuals who are highly likely to outperform the S&P over long stretches. In my lifetime, though, I’ve identified – early on – only 10 or so professionals that I expected would accomplish this feat.”
– via MoneySense

So, What Are ETFs?

So let’s say you’re ready to follow Buffett’s advice – how do you get started? What are ETFs and why are they such a smart long-term investment?

The “It” equity — the exchange-traded mutual fund — is no spring chicken. It’s been around since the early 1990s. But ETFs are still turning heads. It’s no wonder: The combination of index investing with the handiness — and lower costs — of individual stock ownership is irresistible. Are ETFs a good match for your portfolio? Read on…

What exactly is an exchange-traded fund (ETF)?
“Exchange-traded” refers to shares that trade all day long on the major stock market exchanges (just like regular stocks). “Funds” are investing vehicles that hold dozens, hundreds, or even thousands of companies under one umbrella unified by a particular investing theme (such as companies that comprise the Dow or ones whose main business is in the biotech industry). Like any other publicly traded company, ETFs have ticker symbols (snappy ones, in fact, like Cubes, Spiders, and Diamonds). But instead of typing “MSFT” to buy Microsoft, for example, you enter “DIA” for the Dow Jones Industrial Trust, or “Diamond” ETF. Do you need diamonds in your portfolio?

Diversify Your Portfolio
Do you crave exposure to foreign indexes? Are your holdings a little heavy in large American companies? Do you think biotechnology is a boom industry, but aren’t comfortable committing money to one particular company? There are ETFs to represent virtually any segment of the market — both here and abroad — nearly any way you slice it. There are ones tracking everything from bonds, REITs, and the utility sector to the pedestrian Fool favorite S&P 500. If that sounds a lot like the index mutual fund market’s offerings, it is. For some investors, though, ETFs are a better fit for their investment dollars.

ETFs are Flexible
If you’d like to add an indexing element to your portfolio and are prepared to invest a lump sum, ETFs provide some flexibility you might find useful. Like regular stocks, they can be bought or sold anytime the market is open via your brokerage account.

If you plan to dollar-cost average (adding small, systematic amounts to build a portfolio), ETFs haven’t always been ideal but now almost all large brokers offer commission free ETF trades which are ideal for dollar-cost averaging.

As a stock, ETFs can be optioned, shorted, hedged, and bundled.
– via The Motley Fool

Have you invested in ETFs? What has been your investing experience, overall?

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