Last week I wrote an article about why the greatest investor (and stock-picker) of all-time – Warren E. Buffett – advocates that most investors just stick with index funds rather than trying to follow in his footsteps in actively choosing stocks.
As Mr. Buffett is a proud American, he of course advocates investing in a typical S&P 500 ETF – which tracks the largest 500 public companies over in the US. He equates this to buying a 'slice of America' and making a bet on America's future, which (as he notes) has always worked out well.
That's all well and good for our patriotic friends across the Pacific, and you can buy a similar S&P 500 ETF on the ASX too – the iShares S&P 500 ETF (ASX: IVV) is a good choice, in my opinion. But what about us Aussie investors that would rather bet on our own future and buy a 'slice of Australia'? After all, Australia (and not the US) is the only developed nation to avoid a recession for the past 30 years.
Well, I think the same logic applies to our stock market. In his 2004 Berkshire Hathaway shareholders meeting, Buffett was asked why he recommends index funds. Buffet has this to say:
Among the various propositions offered to you, if you invested in a very low cost index fund — where you don't put the money in at one time, but average in over 10 years — you'll do better than 90% of people who start investing at the same time… If you like spending 6-8 hours per week working on investments, do it. If you don't, then dollar-cost average into index funds. This accomplishes diversification across assets and time, two very important things.
So there you have it: diversification, time, low-fees and dollar-cost averaging are the best guarantees of wealth for the 'average ' wannabe investor.
So which ASX index fund would Buffett recommend? Well, he's made no secret of his love for Vanguard's low-cost funds, so perhaps your best bet would be the Vanguard Australian Shares Index ETF (ASX: VAS). With only a 0.10% management fee, you're getting a lot of bang for your buck. If you really want to seek out the lowest fees, the BetaShares Australia 200 ETF (ASX: A200) is also a great pick – charging a paltry 0.07% management fee.
Foolish takeaway
Like almost all of Warren Buffett's famously folksy advice, I think this nugget of wisdom is worth considering. If you're thinking about investing but feel over your head (or maybe you've just made some silly mistakes, we all have!), an index fund investment might just serve you well!
