Buffett's advice on index funds

[ProverbialPaul]

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

 

[craft]

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.

 

[ProverbialPaul]

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.

 

[craft]

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.

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.

 

[ProverbialPaul]

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

 

[ProverbialPaul]

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

 

[craft]

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.

 

[reggiedunbar]

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.

 

[zac]

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%.

 

[So_Cynical]

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.

 

[zac]

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.

 

[Julia]

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?

 

[zac]

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.

 

[Julia]

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?

 

[village idiot]

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

 

[Julia]

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.

 

[village idiot]

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.

 

[McLovin]

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.

 

[Ves]

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.

 

[Julia]

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.