Warren Buffett has never been a fan of the investment fees that hedge funds charge. In 2007, he made a $1 million against any hedge funds an S&P 500 index fund would outperform their fund selection over 10 years after fees.
Protégé Partners was the only hedge fund who took on the bet, and the S&P 500 beat them decisively. Warren Buffett’s S&P 500 investment fund retuned 7.1% annually, while his competitor averaged only 2.2%.
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The Best Investment to Make
In 2018, Warren Buffett recommended that investors, “Consistently buy an S&P 500 low-cost index fund.” He also stated that, “I think it’s the thing that makes the most sense practically all of the time.”
His logic makes sense for two reasons. Most investors won’t beat the market, and index funds are inexpensive compared to high priced mutual funds.
Warren Buffett’s investment logic is that you’ll be in better shape than most as long as you match the market. His logic is due to the fact that 95% of professional investors do not beat the market over 10 years.
Once you are tied to the success of the market, your next step is to keep your fees as low as possible. Doing will will maximize your future net worth.
Don’t Blindly Invest in the S&P 500
Although Warren Buffett recommended that you invest in the S&P 500 “practically all the time”, you should always be mindful of the price you’re paying for. Similar to how you value stocks, keep an eye on the S&P 500’s price to forward earnings. As of October 2018, the S&P 500 is trading at 16x forward earnings. Since the S&P 500 trades at 16x forward earnings on average, the market is not incredibly overvalued.
With that said, the S&P 500 was trading at 22x forward earnings just a few months prior. As the price of the S&P 500 trades at a higher premium, the more you should consider alternative investments such as emerging markets.
Warren Buffett Investment – The Bottom Line
With all of the investment options out there, there has never been a better time to be an investor. Although there are a lot of options, Warren Buffett recommends that you keep it simple and stick to a low-cost S&P 500 index fund. Doing so will ensure you match the markets returns, while minimizing the fees you’re charged.
Once you have invested, make sure you don’t sell too early.
When you invest in the S&P 500, keep an eye on the price you’ll pay to forward earnings. The higher the premium you pay, the less of a return you’ll realize. Even Warren Buffett agrees that the lower price you pay for an investment, the higher your future return will be.