Investing is intimidating.
Between all of the investment options and all of the talking heads sharing their differing opinions, the task of choosing where to invest and when to invest can be daunting.
Thankfully, I have already explained WHEN TO INVEST in my popular article titled “How Would You Invest $20,000.”
Just to recap, the answer is to ALWAYS be investing by using the technique known as DOLLAR-COST AVERAGING. By buying a fixed dollar amount of a particular investment on a regular schedule, you will purchase more shares when prices are low and less shares when prices are high. As a result, your returns will be greater.
But, the question remains: Where Should You Invest?
What good is knowing HOW TO INVEST and WHEN TO INVEST without knowing WHERE TO INVEST?
As much as I would like to share the opinions of a 28-year-old personal finance blogger with limited experience investing other people’s money, I thought I would share some advice given by arguably THE GREATEST INVESTOR of our time, Warren Buffett.
Simple Investing Advice from Warren Buffett
As most of you know, Warren Buffett became one of the World’s Wealthiest People by purchasing stocks (portions of businesses) and entire businesses. But, Mr. Buffett recognizes that “most investors have not made the study of business prospects a priority in their lives.” He added, “If wise, they will conclude that they do not know enough about specific businesses to predict their future earning power.”
I have good news for these non-professionals: the typical investor doesn’t need this skill.
From the sound of it, Warren does not want or expect you to follow in his footsteps. While it’s important to be financially literate, you do not need to read balance sheets and income statements in order to gain satisfactory returns.
In aggregate, American business has done wonderfully over time and will continue to do so (though, most assuredly, in unpredictable fits and starts). In the 20th Century, the Dow Jones advanced from 66 to 11,497 paying a rising stream of dividends to boot. The 21st Century will witness further gains. 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 500 Index Fund will achieve this goal.
If you’re curious, this content is coming directly from one of Warren’s Letter to Shareholders from just a year ago. He continues:
That’s the “what” of investing for the non-professional. The “when” is also important. The main danger is that the timid or beginning investor will enter the market at a time of extreme exuberance and then become disillusioned when paper losses occur. The antidote to that kind of mistiming is for an investor to accumulate shares over a long period and never to sell when the news is bad and stocks are well off their highs.
Hmmm. I wonder if Warren reads my blog? I feel like I’ve seen this before.
Following those rules, the “know-nothing” investor who both diversifies and keeps his costs minimal is virtually certain to get satisfactory results. Indeed, the unsophisticated investor who is realistic about his shortcomings is likely to obtain better long-term results than the knowledgeable professional who is blind to even a single weakness.
You know that friend that always gives you “insider stock picks?” He has no clue what he’s talking about. Nor does anyone else: Family members, People on TV, Losers with blogs (“hey now!”)…No one.
You will constantly be urged to be active by those who profit from giving advice or effecting transactions. The resulting frictional costs can be huge and, for investors in aggregate, devoid of benefit. So, ignore the chatter, keep your costs minimal and invest in stocks as you would in a farm.
So, there you have it. Warren Buffett wants you to dollar cost average into a broad based index fund.
HOW BORING IS THAT?
You may be thinking, “Well, it’s easy for him to give that advice as he’s out there buying and selling stocks and companies for himself!”
And you would be correct, except for this last minor detail. Warren Buffett has amassed a fortune that will be disbursed with very specific instructions:
My money, I should add, is where my mouth is: What I advise here is essentially identical to certain instructions I’ve laid out in my will. My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% 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.
In other words, you’ll do better than your friends in the stock market with this simple advice from Warren Buffett.
photo credit: DonkeyHotey