Friday, May 02, 2008

On the Subject of Investing

I went through Barnes and Noble a little while back. In the "Investing" section of the store, there are a plethora of books on Warren Buffet, the world's richest man and "the sage of Omaha."

Most of the books go into his philosophy of investing, what he considers most important and what not. In broad brush strokes, Mr. Buffet is a "value investor", a disciple of Benjamin Graham, and likes to buy solid, under-valued companies with good managements. Sometimes he waits years to purchase a company that meets his specs.

But what advice does Mr. B. have for the average, non-professional, semi-skilled investor. You know, the investor who does it part-time and whose main interests are somewhere else? Here it is:

... If you're* not going to be an active investor -- and very few should try to do that -- then you should just stay with index funds. Any low-cost index fund. And you should buy it over time. You're not going to be able to pick the right price and the right time. What you want to do is avoid the wrong price and wrong stock. You just make sure you own a piece of American business, and you don't buy all at one time.

-- Warren Buffet in Fortune Magazine, April 28, 2008

I've invested in various funds long enough to know the man has a firm grasp on what he's talking about. Pay particular attention to "you should buy it over time." This is dollar-cost averaging and is crucial, because over a span of years the index fund is going to move up and down like a freaking roller-coaster, and you want to go right on buying during the dips, so that you're buying cheaper shares when it's down.

What you don't want to do** is panic after a drop and pull money out, because invariably you will be bailing at or near the bottom of the cycle.

Trust me on this.

* I've substituted "you" for "they" throughout the quote.

** I need to point out that I am not a certified financial consultant/advisor.


Anonymous said...

Thank you for reminding readers about the importance of investing.

For what it's worth, Vanguard's filed with the SEC to release a new global index fund in June. It has no small-cap exposure, and its expense ratio is three times that of their Total Stock Market Index (.45% instead of .15%), but folks interested in the Margarita Portfolio would now be able to do it with two funds instead of three.

Anonymous said...

Hi Steve

There is nothing I would like more than to see all of the funds in our 401k become low cost index funds. We have some but why not indexes for all choices? Vanguard style...

Vanguard 500 Index (VFINX)
Vanguard Value Index (VIVAX)
Vanguard Small Cap Index (NAESX)
Vanguard Small Cap Value Index (VISVX)
Vanguard REIT Index (VGSIX)
Vanguard Developed Markets Index (VDMIX)
Vanguard International Value (VTRIX)
Vanguard Emerging Market Index (VEIEX)

phil mcnally

Steve Hulett said...

I've pushed to get more index funds in the Planm, and we've gotten more. I'll bring the subject of index funds up at the upcoming vendor review.

Understand that it isn't just up to me, but the whole board of Plan trustees

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