In 2007, Warren Buffett made a bold move. The legendary investor made a $1 million bet that a simple, no-frills S&P 500 index fund could beat a selection of hedge funds over 10 years. Professionals manage hedge funds for which they charge a flat fee. Many see them as the pinnacle of sophisticated investing.
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However, Buffett believed in something As straightforward as an index fundSimply track the performance of the top 500 companies in the U.S. that perform well over the long term.
What is the result? Buffett won the race comfortably. Over the decade, the Vanguard S&P 500 index fund he chose returned an astounding 125.8%, while hedge funds’ returns varied from 2.8% to 87.7%. However, how can this “normal” investment approach outperform some of the most gifted financial minds?
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Warren Buffett has argued that low-cost index funds are a smart investment option for most people for years. An index fund allows investors to own a piece of each company in the index instead of timing the market or trying to identify the next big stock.
It is a segmented strategy that reflects the overall performance of the market. As Buffett said, “You don’t have to do that, you just have to let American industry do its work for you.”
It may seem very simple, especially when compared to the complex strategies used by hedge funds. However, Buffett has always said that keeping costs low is key to successful investing. Hedge funds typically charge a lot – About 2% of your money every year and 20% of the profit they make. These high fees can reduce your earnings over time.
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In contrast, Vanguard Fund Buffett’s chosen expense ratio was just 0.04%, meaning all of the investment’s growth stayed in the investor’s pocket. “Fees are important in investing, there’s no doubt about it,” said hedge fund manager Ted Seitz, who accepted Buffett’s bet. He later acknowledged that Buffett was right about the impact of high fees.
Despite the clear advantages of low-cost index funds, many wealthy individuals and large corporations continue to seek higher-cost investment strategies. Buffett explained the phenomenon to say“No advisor in the world is going to tell you to buy an S&P index fund and sit on it for the next 50 years. You can’t be an advisor and certainly not get an annual fee that way.”
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This article Warren Buffett Bet $1M Over a Decade of Hedge Funds He Did It With a Strategy That Didn’t Require Investment Skills appeared first Benzinga.com
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2024-09-25 20:45:20