Best Financial Advise For the Investors - Warren Buffet
percent in a very low-cost S&P 500 index ETF fund.
I suggest following two Vanguard’s index ETF Funds
1- Vanguard’s S&P 500 index ETF Symbol = VOO.
2- Vanguard Total Stock Market Fund Symbol = VTI.
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.
Best Financial Advisce for Todays Investors
Put 10 percent of the cash in short-term government bonds and 90 percent in a very low-cost
S&P 500 index fund. (I suggest Vanguard’s ETF Symbol = VOO) 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. - Warren Buffet
5 Basic Rules for successful Investing
Doing well in finance isn't about memorising textbooks. It's more about patience and an even temperament. That's why people with no formal financial training can and do master investing. Doctors might require a decade of school to become competent, but I'd say 90% of successful investing can be summed up with just a handful of simple rules. I spent a lot of time in 2013 writing about simple finance rules. Here are five of my favourites.
1. Wealth Takes Time
Charlie Munger, Warren Buffett's investing partner, put it best: "You don't have to be brilliant,
only a little bit wiser than the other guys, on average, for a long, long time." Warren Buffett is a
great investor, but what makes him rich is that he's been a great investor for seven decades.
Of his current $60 billion net worth, $59.7 billion was added after his 50th birthday, and $57 billion
came after his 60th. If Buffett started saving in his 30s and retired in his 60s, you would have never
heard of him.
His skill is investing, but his secret is time.Understanding the value of time is the most
important lesson in all of finance. The single best thing we can do to improve the financial state of
Americans is encourage people to save from as early an age as possible.
2. Most financial problems are caused by debt.
I have a family friend who earned several hundred thousand dollars a year as a specialist in an advanced field. He went bankrupt a few years ago and will probably need to work for the rest of his life.
I know another who never earned more than $50,000 a year but retired comfortably on his own terms.
The only real difference between these two friends is that one used debt to live beyond his means while the other avoided it and accepted a realistic standard of living.
Just as saving gives you options in the future, debt takes options away. Not having the option of flexibility is the root of most financial problems.
You can be a brilliant worker (or investor) and find yourself in financial ruin if you don't respect the power of debt. Income, wealth, and standard of living aren't as correlated as people think.
3. Forecasting market returns is close to impossible. Worse, it's dangerous.
A stock's future returns will equal its dividend yield, plus its earnings growth, plus or minus changes in valuations (earnings multiples). That's really all there is to it.
Dividends and earnings growth for many companies can be reasonably projected.
But what about the change in valuations? There's no way we could possibly know that.
Stock market valuations reflect people's feelings about the future, swinging between optimism and fear. And there's just no way to know what people are going to think about the future in the future. How could you?
If someone said, "I think most people will be in a 9.26% better mood in the year 2024," we'd call them delusional. When someone does the same thing by projecting 10-year market returns, we call them investment gurus.
We know a group of high-quality companies will build wealth for their shareholders over time. But we can never be specific when trying to guess what the stock market might do going forward.
Assuming we can predict exactly what stocks will do in the future makes us blind to risk and uncertainty. Coming to terms with an unpredictable future forces us to be nimble and prepared. You can guess which group does better.
4. Simple can be better than smart.
Someone who bought a low-cost S&P 500 index fund in 2003 and left it alone earned a 97% return by the end of 2012. That's great! And they could have spent the last 10 years at the beach, or hanging out with their kids.
Meanwhile, the average fancy professional U.S. market-neutral hedge fund -- many of which are staffed with PhDs and some of the world's fastest computers -- lost 4.7% over the same period, according to data from Dow Jones Credit Suisse Hedge Fund Indices.
The average U.S. stock-trading equity hedge fund produced a 96% total return -- still short of a simple index fund.
There are no points awarded for difficulty in investing. Smart people who devote their entire lives to investing can (and often do) fail, while some of the simplest investing techniques you can think of are wildly successful.
Good businesses run by good people purchased at good prices held for as long as possible. That's it.
That's exactly the technique Scott Phillips and I employ at Motley Fool Share Advisor, our ASX-focused member-only stock-picking newsletter, and with good effect.
Since inception in December 2011, the returns of the average Motley Fool Share Advisor ASX-recommended stock are soundly ahead of the All Ords.
5. The odds of experiencing stock market volatility are exactly 100%.
Most investors understand that stocks produce superior long-term returns, but at the cost of higher volatility. Yet every time there's even a whiff of volatility in the stock market, the same cry is heard from investors around the world: "What the heck is going on?!"
The majority of the time, the honest and correct answer is the same: Nothing is going on. This is normal and just what stocks do.
Since 1900 the S&P 500 has returned about 6% per year, but the average difference between any year's highest close and lowest close is 23%. Volatility, even really severe swings, is perfectly normal and shouldn't be feared.
Accepting market volatility as normal and focusing on the businesses I own is a lesson I've learned from many people, but particularly from my Motley Fool Share Advisor colleague Scott Phillips. Scott is one of the coolest and calmest investors I know.
His ability to remain steadfast in the face of market volatility is astounding. Amongst many others things, I know members of Motley Fool Share Advisor appreciate and value his cool head when volatility again returns to world stock markets.
One final tip for 2014, and beyond.
As we head into 2014, one of the best things you can do to improve your experience as an investor is remind yourself that investing may not be easy, but it's not difficult or complicated.
Professional investors and pundits make it seem complicated because they think of it like medicine, complex and dependent on detailed knowledge. It's not. This isn't brain surgery.
All we're doing is spending less than we earn, saving the difference, investing it, and waiting.
As ever, I wish you happy and profitable investing in 2014 and beyond.
Investing 101: Defining Pullbacks, Corrections and Bear Markets
Corrections are a function of time and price. The last three weeks proved yet again that momentum stocks take the escalator up and the elevator down. That means we could be 15% above the bottom but we’ll be getting there soon. As a general proposition, varying slides from all-time highs will have investors asking themselves what stage of market downturn stocks are experiencing. In this installment of Investing 101, Erica Coogan of Moss Adams helps us break down and define the differences between a bear market and smaller downward movements like pullbacks and corrections.
Pullback: typically defined as a 5% dip from a recent high, and often times seen as a buying opportunity during an ongoing bull market. For Coogan, a pullback is a “temporary blip of the peak of the market, almost a ‘sigh’ in upward momentum; it’s very short term, and you’re still continuing up in a bull market.”
Correction: usually a 10% move lower from new highs. It’s more severe in nature, but could possibly just be a healthy dip as some investors take profits and others adjust their risk/reward ratios. The question here is whether companies in general still in good shape, or is the stock market a leading indicator of weakness in the overall economy, and will corporate America be the next area to feel weakness in growth.Despite a correction being jarring for investors, Coogan says for her and other market watchers “it’s still defined as a shorter-term pullback in a bull market, it’s just a little more significant than the pullback that’s less than 10%”
Bear market: a 20% or great tumble in the market. This 20% downturn is “usually something that’s sustained for a couple months,” Coogan says, where from an investor psychology perspective “pessimism breeds pessimism, and you get that continued downward trend, and that can be hard because you don’t know actually when it could stop.” Thus trying to predict the absolute bottom can be very difficult for an investor trying to time the market, but the risk/reward payoff for those that do can be astounding (just look at the run up from 2009 March lows).
Investing in ETFs: Your Future Self Will Thank You
- In 2012 investors put a total of $154 billion into exchange traded funds, or ETFs, while removing $119 billion from mutual funds.
- The move from actively managed mutual funds to passive ETFs is a good one for investors.
- ETFs tend to have far lower fees than mutual funds, which in the long term matters quite a bit.
- A lot of money is being moved into bond ETFs, which is another problem entirely, but investors moving money from mutual funds to stock-based ETFs are most likely making the right move.
- On average, mutual funds tend to under perform major indices.
- Of course, some active fund managers do very well in the long run, averaging returns well above the market as a whole.
- The problem is finding that fund out of the sea of mediocre mutual funds. Unfortunately, many people choose the funds that have done the best recently, which is almost always a recipe for disaster.
- And because mutual funds charge much higher fees than ETFs (on average about 1.4% of assets), the funds need to do better than the ETFs just to match their performance after fees.
- If an ETF with an expense ratio of 0.1% returns 8% per year before fees than a mutual fund with an expense ratio of 1.4% must return 9.3% before fees just to match the ETF's performance.
- Companies offering ETFs have been aggressively lowering fees in order to gain business.
- The ETFs which track the S&P 500 have rock-bottom expense ratios.
- Vanguard Total Market ETF (VTI) has an expense ratio of just 0.05%
- Vanguard S&P 500 ETF (VOO) has an expense ratio of just 0.05%.
- Generally the broad-based index tracking funds have extremely low fees.
- In order to show just how detrimental the higher fees of mutual funds can be, let's imagine two hypothetical young investors:
- Billy and Johnny. Both are 25 and decide to start a retirement account for when they retire at age 65, 40 years from now.
- They initially invest $10,000 and plan to add an additional $5,000 each year. For simplicity I'll ignore taxes and trading fees.
- Billy decides to invest in S&P 500 index fund, choosing the Vanguard ETF with a 0.05% expense ratio.
- Johnny decides to invest in hot mutualfund which did really well last year.Expense ratio is 1.4%.
- Over the 40 years of their investing lifetime both the ETF which Billy chose and the mutual fund which Johnny chose returned 8% before fees.
- Obviously, Billy will have a larger retirement account than Johnny. But how much larger?
- At the end of 40 years Billy has $1,489,952 while Johnny has only $999,083.
- Billy has a full 49% more than Johnny! And as time goes on this difference gets even bigger.
- After 50 years it grows to 68% and after 60 years the difference is an astounding 91%.
The Bottom Line
- High fees will kill your long-term returns. While some mutual funds outperform the market considerably, most will leave you disappointed.
- A much better alternative is to invest in a broad-based ETF such as the three mentioned above and enjoy near-inconsequential fees.
- Over the long run the high fees of mutual funds will eat you alive.
- Those running the fund get paid regardless of how they do, even if they lose your money.
- So do yourself a favor and stop paying exorbitant fees: your future self will thank you.
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