Investing in Low Cost Index Funds

In advice for his trustee to follow upon his passing, investing genius Warren Buffett says: “Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund.”

Evidently, Buffett favors low-cost, low-risk index funds over other higher-risk investment vehicles.

Are you an active investor? Here’s a sobering thought to consider: Most investors actually fail to beat the market – and that’s often by a significantly wide margin.

Investors hurt their performance in a number of ways, including failed attempts at timing the market, taking excessive risk, emotion-driven trading, investing beyond one’s level of competence and more.  Aside from these investors’ mistakes is the fact that many investment funds charge excessive fees that drastically reduce returns and dividend income. And yet, investors continue to make these mistakes and lose money on the market.

That’s why it’s so incredible that Buffett, who may just be the most successful stock-picker ever, recommends investing in passive index funds. As noted above, Buffett tells his trustee to put most of his assets into a low-cost S&P 500 index fund. He says, “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.”

Clearly, Buffett believes that low-cost, passive indexing is an investment strategy that is far superior to other high-risk options which may offer higher returns. Despite his uncanny ability to pick out winning stocks, the investing mogul prefers to place his money in safer, low-cost vehicles.

Take a page out of Buffett’s book and consider investing in an inexpensive index fund today.

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