# Buffett's advice on index funds



## ProverbialPaul (29 February 2012)

Saw a video on youtube last night where Warren Buffet said most people should put their money into low cost index funds.

I probably fit into the catagory he mentioned.....Not enough knowledge and not enough capital for share trading so what is everyone elses thoughts on this?

Regards


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## craft (29 February 2012)

ProverbialPaul said:


> Saw a video on youtube last night where Warren Buffet said most people should put their money into low cost index funds.
> 
> I probably fit into the catagory he mentioned.....Not enough knowledge and not enough capital for share trading so what is everyone elses thoughts on this?
> 
> Regards



Beating the index is a zero sum game. For every outperformance there must be a corresponding underperformance – It’s a mathematical certainty.

If you can’t beat the market because you don’t have the passion, capital, ..... then it’s better to buy the market average then make a half arsed attempt only to end up funding somebody else’s outperformance.

‘Low cost’ is extremely important in the statement because that is the only variable you control. The lower your cost the closer to the index performance you get.

John Bogle has written extensively on this. I think the book is called commonsense on mutual funds.


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## ProverbialPaul (29 February 2012)

Thank you craft

So a mutual fund is the same thing as an index fund? So many terms! What percent return would I be looking at with this route considering a high interest savings account would give me 6.01%?

I certainly have the passion to try. Not yet the capital. Or the knowledge. It is very time consuming reading all that I have read even up to the early stage that I am at now.


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## craft (29 February 2012)

ProverbialPaul said:


> Thank you craft
> 
> So a mutual fund is the same thing as an index fund? So many terms! What percent return would I be looking at with this route considering a high interest savings account would give me 6.01%?




Lots of different names and lots of different intricacies. 

These are the just the funds that are listed on the exchange – there are many more that are not listed.

http://www.asx.com.au/products/managed-funds-product-list.htm


If I was going to buy the Australian market at the lowest cost I would probably look at the Vangaurd Australian shares Index ETF (VAS). It mimics the S&P Index 300 and has a management expense ratio of 0.15%

BUT whilst you will get the index return for a low cost – that index return could be poorer then your 6.01% savings account.  The shorter the time frame you are looking to invest the more likely the index could underperform cash.




ProverbialPaul said:


> I certainly have the passion to try. Not yet the capital. Or the knowledge. It is very time consuming reading all that I have read even up to the early stage that I am at now.



 It is time consuming to get your head around everything but i'm sure if you have a  passion you will get there.


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## ProverbialPaul (29 February 2012)

Thank you once again.

I came across vanguard a while ago but had never gone back to look more into it. I will now though. That you for the advice.

Regards


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## ProverbialPaul (1 March 2012)

Would it be just as safe to invest in Blue Chip Companies?


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## craft (1 March 2012)

ProverbialPaul said:


> Would it be just as safe to invest in Blue Chip Companies?




It is not safe to invest in anything until you fully understand why that particular route may be unsafe and you have allowed/managed  for the potential risks.


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## reggiedunbar (8 March 2012)

ProverbialPaul: if I were you I'd ask myself a few questions first.

Do I think an Index Fund can give me a better return than 6.01% and why?
If so, how much riskier is it than a bank deposit?
Am I comfortable with that level of risk?
If I bought an Index Fund a year ago, how much would it be worth now?

Cheers.


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## zac (8 March 2012)

Ive just noticed this thread but as I did so much research on this very topic last year I'll give you my run down.

Ive a lot of my wealth tied up in an Index Fund where as Im also investing/trading in ASX and other markets.

I went to 3-4 Financial Planners last year and they all tried selling me Managed Funds. This was before I was aware of Index Funds.
In trying to sell the Managed Funds they all compared their results to the Index stating that was the benchmark to achieve.

Given the fee's etc of a Managed Fund I immediately went to an Index Fund. There are some MF's however that beat the index but then how do you find which ones that can do this every year?

The other question to consider do you go through a Financial Planner to set these up. Thats something you need to workout yourself.
So you can go through a Financial Planner, or get the PDS/Application from the Financial Institution or Trade them directly on the Exchange.

So in the end I personally invested in an Index Fund on the ASX via an ETF. Im glad I did the research, saved me so much in fee's.

I suggest before any decision is made to understand Mutual Funds, Index Funds, Listed Investment Companies and ETF's (Exchange Traded Funds)

Lastly the rule that you need to hold the investment minimum 7-10 years; that perhaps may have been true of the past and its debatable whether it still will be the case in the future. So buying into them when theyre cheap is the best move.

As an example if you bought into the ASX in 2007, (5 years ago) Youd still be down ~35%.


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## So_Cynical (8 March 2012)

zac said:


> Lastly the rule that you need to hold the investment minimum 7-10 years; that perhaps may have been true of the past and its debatable whether it still will be the case in the future. So buying into them when theyre cheap is the best move.
> 
> As an example if you bought into the ASX in 2007, (5 years ago) Youd still be down ~35%.




An index ETF should be treated like any other stock and brought as cheaply as possible.

If you brought and Index EFT in early 2009 (3 years ago today) you would be up 32+% now...timing is important.


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## zac (8 March 2012)

So_Cynical said:


> An index ETF should be treated like any other stock and brought as cheaply as possible.
> 
> If you brought and Index EFT in early 2009 (3 years ago today) you would be up 32+% now...timing is important.




Youve put it nicely.
I just dislike the way these finance people give spin and say it doesnt matter as its a long term investment that should be held 7+ years.
The reality of it is as mentioned above you could make substantial gains within 12-24 months or even 7+ years be at a loss or certainly not at a gain.


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## Julia (8 March 2012)

zac said:


> Youve put it nicely.
> I just dislike the way these finance people give spin and say it doesnt matter as its a long term investment that should be held 7+ years.
> The reality of it is as mentioned above you could make substantial gains within 12-24 months or even 7+ years be at a loss or certainly not at a gain.



 zac, why do you think these financial advisers are making such a recommendation on timing when they are trying to sell you managed funds?


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## zac (8 March 2012)

Julia said:


> zac, why do you think these financial advisers are making such a recommendation on timing when they are trying to sell you managed funds?




Do you mean when they say timing doesnt matter?
I know theyve a job to do and a product to sell and I guess at the end of the day their target audience would be Mum & Dad type investors with little idea on the market. Not to say theyre being deceitful but providing generic responses which satisfies the majority.

I guess the moral of the story here is do your own research too, from different sources and from people who arent making any potential gain from the information they provide you.
Im so glad I did.


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## Julia (10 March 2012)

zac said:


> Do you mean when they say timing doesnt matter?



That wasn't what I had in mind.  I'm trying to get you to think about reasons other than the best financial interests of the client which may be influencing the advice they are offering.

Think about how, when the GFC occurred, these advisers all over the place were telling people to just sit tight in their managed funds, it would be all OK, no worries, markets always come back etc.  Well, as we all know, those clients who accepted this advice saw a decline in their wealth of up to 50% which wouldn't have occurred if they had been advised to move to cash early.

So, do you think all those advisers were so uninformed and useless that they just didn't see it coming?


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## village idiot (10 March 2012)

> So, do you think all those advisers were so uninformed and useless that they just didn't see it coming?




presumably you did Julia and made millions shorting the market?  if not, why not, when it was all so predictable?

if failing to predict the future makes one useless and uninformed at least they share that with the rest of us


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## Julia (10 March 2012)

village idiot said:


> presumably you did Julia and made millions shorting the market?  if not, why not, when it was all so predictable?



Thank you for your interest, village idiot.  No.  The Trust Deed of my SMSF does not allow me to short anything, but at least I protected most of my profits by getting out and going to cash.



> if failing to predict the future makes one useless and uninformed at least they share that with the rest of us



Perhaps consider that you might be misunderstanding the reason for my asking zac that question.

1.  Is it not true that most of the 'experts' did fail to see the GFC coming, if we are to take at face value their advice to clients that all would be well?

2.  Is it really credible that so many of these "experts" had no idea what was happening when ordinary people who had no more expertise than the capacity to follow the news realised it was more than likely things were going to go very bad?

I don't think so.

So what I was asking zac  was to consider what other possible reasons these advisers might have to give the advice they did to so many of their clients.

You might have the answer for him?

Btw, my earlier impressions of your comments in various posts have been that your nic is quite inappropriate.


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## village idiot (11 March 2012)

Hi Julia

At the time of the GFC i was busy running a pub and had no direct  interest in the market, so I cant remember personally what I thought was going to happen at any particular time, but I dont have any recollection of it being obvious to the man in the street/pub what was going to happen in advance. Nevertheless you may be right about that. 

My comment was along the lines of at any point in time market prices generally reflect the information widely available and the probabilities of various outcomes as weighed by all participants, in real time it is never as obvious as is made out afterwards, and the coin is never so weighted that there is only one blindingly obvious action to take, such as going completely to cash after a presumably small fall (I say presumably small since you refer to getting out 'early').

If it was to you and you did, well and good, congratulations. However I am just saying I personally dont agree with the sentiment that you (and others at times) have expressed that with benefit of hindsght it was all so obvious that anybody, and financial advisers as a group in particular, who didnt get out or advise their clients to get out, was either an idiot or wilfully deceitful.

But, in the spirit of my comments that nothing is ever that cut and dried,   I do make room for the possibility that I just really am an idiot


I understand what you are saying about  adviser's motives for advising as they do about timing, and dont disagree with you there.


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## McLovin (11 March 2012)

Julia said:


> So, do you think all those advisers were so uninformed and useless that they just didn't see it coming?




FWIW, I think a large proportion, perhaps a majority, didn't see it coming. Most of the FA's I have met make the guys who work at credit agencies seem like Einsteins. And analysts at credit agencies are only working at a credit agency because they can't get a job in any other part of finance/banking.

Confidence is a fickle beast. When confidence is high, anything is possible. Unfortunately, most don't understand that it can evaporate a lot quicker than it appeared.


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## Ves (11 March 2012)

Julia said:


> Thank you for your interest, village idiot.  No.  The Trust Deed of my SMSF does not allow me to short anything, but at least I protected most of my profits by getting out and going to cash.



If everyone had cashed in their shares because they "saw it coming" wouldn't the end result be exactly the same? More supply than demand equals lower prices. The people who cash out last lose the most.


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## Julia (11 March 2012)

village idiot (I do wish you'd change that nic !) and McLovin

Thanks for your comments.  It seems my expectations of the skills of financial advisers are a bit unrealistic.

The point I was really trying to make to zac (who has previously disclosed that he's pretty new to learning about the market and who was considering paying a really large sum for someone to mentor him) was that various 'advisers' can often act out of self interest rather than the best interests of their clients.

In this instance, with so many people in managed funds at the time of the GFC, these Funds were earning advisers very healthy commissions, so obviously if they'd pulled their clients out, their own commission income would have been adversely affected.

The enquiry into the financial services industry last year recommended that in future advisers should be *required to act in the best interests of their clients.*
Now, wouldn't you think advisers would already have been doing this?
Isn't that what any client would imagine would happen when they sought advice?

How astonishing (and shocking, really) that the notion of an adviser acting in the best interests of a client should be some sort of revelation!

So, my intention was to get zac to think about the possible ulterior motives of advisers and to focus on educating himself and taking control of his own finances.

But perhaps my conclusion that advisers would indeed have seen it coming and were therefore acting amorally is quite wrong.

Re my own exit, I should say that I have a very low risk tolerance and my main focus is always capital preservation.  I retired early from the workforce (hooray) and have to generate an income from my capital.  Hence I'd rather sell out, be wrong, and have to buy back in if I am, than watch that capital base fall.

Someone not dependent on their capital for an income, and who has many years to retirement, is in a quite different position where they can wait for the market to recover.  I still don't like that approach, but it's less of a problem if you're 20 than 50

Hope this clarifies what I was on about and apologies if I've generated either confusion or the sense that I was criticising anyone here.  I wasn't at all.


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## zac (11 March 2012)

Thanks Julia.
Yeah ive learned to act in my own interests. That was largely why I went about entering into a fund on my own.
Ive been talking to a mate who has the financial planner qualifications. He's shed some light on the inside workings of some of these funds.
At the end of the day theyre sales people pushing a product and have internal pressure to promote certain products and meet certain KPI's.

As for when theres confidence in the market, its time to be very alert when there's that euphoria.
Late last year was an excellent time in the market as a bull market is born at maximum pessimism. While the market is still pessismistic, it seems fear is slowly dying.


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## McLovin (11 March 2012)

Julia said:


> The enquiry into the financial services industry last year recommended that in future advisers should be *required to act in the best interests of their clients.*
> Now, wouldn't you think advisers would already have been doing this?
> Isn't that what any client would imagine would happen when they sought advice?
> 
> How astonishing (and shocking, really) that the notion of an adviser acting in the best interests of a client should be some sort of revelation!




It's absurd, isn't it!

I think the whole industry needs to be treated more as a profession rather than a something for people with sales experience to fall into. Of course there are highly competent FA's who believe that there job is to look after the best interests of their clients but on the whole it's still far too easy to be a fly-by-nighter. Working on commission is sort of the same as my accounted being compensated based on how much tax I pay. I can't think of any other professionals who derive the majority of their income from commission.


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## village idiot (12 March 2012)

perhaps the real problem was that those who made their money from commission, especially where they were tied to a particular company's products, were ever allowed to represent themselves as an 'adviser' rather than a salesman.  perhaps that title should have been reserved for those that were operating a different model such as 'fee for service' model, which would have at least let the public know what animal they were dealing with.

going forward it has changed anyway with the commission based model being pretty much outlawed for new business, which solves that problem.


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## Julia (16 March 2012)

This opinion piece goes to my earlier suggestion about loyalties of advisers/economists being more slanted toward self interest than that of the client.



> Economic policy tends to run in a similar fashion, with a clique of leading economic thinkers chosen to reform policy in accordance with best practice – or so we are told. For those less burdened with such delusions, best practice means not what is in the best interests of the public, but rather what benefits the narrow sectors of concentrated private wealth and privilege that huddle behind the conservative nanny state, including the economists who are devising these policies.




Full article from Business Spectator here
http://www.businessspectator.com.au...tent=22724&utm_campaign=kgb&modapt=commentary


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## zac (24 March 2012)

Heres an article in relation to Index Funds and their Active counterparts 
http://www.forbes.com/sites/investor/2012/03/23/indexing-mostly-beats-active-management/?partner=yahootix

Just on that, while the market was depressed, a good Index fund would have been to get into one of the American ones as they have had good movement.

The All Ordinaries hasnt been performing too well, most of it is Mining based and due to our high currency amount it doesnt make exporters too profitable.

Japan is having a similar problem and are at 30 year lows economically.
So if I had spare capital, id be investing in the Nikkei as theyre actively deflating their currency now and working on economic policy.


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## Mr McGee (24 March 2012)

zac said:


> Just on that, while the market was depressed, a good Index fund would have been to get into one of the American ones as they have had good movement.
> 
> The All Ordinaries hasnt been performing too well, most of it is Mining based and due to our high currency amount it doesnt make exporters too profitable.
> 
> ...




Just a thought on that from the boffins in my head. How would you invest in the Nikkei? Buffett's advice on index funds stems from his age old stance that you can only control two things, the asset you invest in and the _*fees*_ you pay! So with that in mind, do you think that investing in the Nikkei directly and losing the low MER of the Aus ETF's and the CGT discounts for long term investors, plus taking on currency risk is really the way to go? Or are you referencing something like the Street Tracks all world ex US index tracker? Just asking and trying to learn. 

Thanks.


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## zac (25 March 2012)

Mr McGee said:


> Just a thought on that from the boffins in my head. How would you invest in the Nikkei? Buffett's advice on index funds stems from his age old stance that you can only control two things, the asset you invest in and the _*fees*_ you pay! So with that in mind, do you think that investing in the Nikkei directly and losing the low MER of the Aus ETF's and the CGT discounts for long term investors, plus taking on currency risk is really the way to go? Or are you referencing something like the Street Tracks all world ex US index tracker? Just asking and trying to learn.
> 
> Thanks.




Im not sure I follow exactly what you mean.
I havent invested in the Nikkei but I have a short position on the YEN which so far has generated around 700%.
The Nikkei is currently around 30 year lows and with the devaluation of the Yen its finally allowing companies to export with higher earnings hence a rise in the Nikkei.


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## Mr McGee (25 March 2012)

Yep. Get all that. What does it have to do with the topic of Buffett's advice on index funds? Trying with my last post to point out that perhaps this thread had come off topic.

Sorry if I missed the relevance of your point in the context of this post.


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## zac (25 March 2012)

Yeah my bad if I got off topic.
I was just trying to highlight how its possible to take advantage of certain markets by just investing in the Index at ideal times.
Ive an Aussie Index fund but realise now it wasnt the best move. Its no surprise that the All Ords is having trouble breaking 4400, our currency is just way too strong for the export market and we rely on China perhaps a little too much.


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## Sir Osisofliver (26 March 2012)

I think what Julia was getting at was the topic of this thread 

Having been in the industry a while what a lot of FA's failed to do during the GFC was *protect* the assets under their control...and managed funds are incapable of doing so...it's simply not written into the charter of the product for them to be able to protect those assets.  The only thing that an investor can do to mitigate systematic risk if holding a managed fund is to liquidate their position.

You also need to consider that FA's sit under the control and guidance of the AFSL licence holder. I know plenty of FA's that indeed were aware that we were approaching or in a mature market during the GFC, but were unable to act *in the best interests of their clients* because of the Licensee.  One in particular sticks in my mind because the Licensee *fired him* because his revenue targets were unmet as he was converting his clients to cash products that didn't pay anywhere near the same commission.

@ Village  Whilst the new legislation is *designed* to fix the problem, you're thinking that a bunch of politicians can outthink a bunch of sneaky bastards...I mean finance professionals. How successful do you think they will be?

Cheers

Sir O


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## village idiot (26 March 2012)

I doubt this bunch of politicians could out think a halfwits convention. 

In general when pollies change laws they seem to assume that the behaviour of the population will not change in response to the changed rules, but it usually does.


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## odds-on (27 March 2012)

village idiot said:


> I doubt this bunch of politicians could out think a halfwits convention.
> 
> In general when pollies change laws they seem to assume that the behaviour of the population will not change in response to the changed rules, but it usually does.




I once read a book on statistics written by a presenter of a statistics program on Radio 4 in the UK. One of the chapters contained the results from a survey of government and BBC journalists about average household income in the UK, it was outstanding the number of government members and BBC journalists who were way off the mark, in some cases 3 or so times the actual average. The complexity of an economic and social system means that nobody in government is ever really going to have a true handle on it and therefore provide appropriate government policy, but there is one fact that everybody can sleep easy with and that is - somebody somewhere will be trying to find an angle to make a buck. With investing I see it as a game to find who will be making the buck, not how to make a buck.


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