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Why Warren Buffett Loves Index Funds! S&P 500 ETF GOOD INVESTMENT CHOICE? - YouTube
Channel: fu academy
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Did you know that in the US, the money investedÂ
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in passive funds have alreadyÂ
overtaken active funds?
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Even Warren Buffett, one of the greatest activeÂ
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investors of all time, is aÂ
big fan of passive index funds.
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He said multiple times that the best thing
the average investor can do is to invest in
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a fund that passively tracks the S&P 500.
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But why does he like index funds so much?
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And does it mean that they are a good choice
for you as well?
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These are the questions that we will look
at in this video - so letâs go!
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Whatâs up everyone?
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This is fu academy - your channel for financial
education.
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And on this channel, I share lifestyle, investing
style and educational videos - just like this one.
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So if you are new here, consider subscribing.
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Just very quickly if you're not sure what
an index fund is.
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A fund provider like Blackrock, for example,
sets up a fund with an objective to track
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an index like the S&P 500.
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So, Blackrock goes out and buys all of the stocks
of the S&P 500.
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And if the S&P 500 goes down 1%, then the
index fund will do exactly the same thing.
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As an investor, you can now buy a share of
that index fund.
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And each share of that index fund holds a
portion of all the companies that are in an index.
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So, Instead of going out and buying all the
500 stocks of the S&P 500, you can simply
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buy into an S&P 500 index fund.
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If you wanna learn more about it, and what
the differences are between mutual, index
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and exchange-traded funds, then check out
the video in the link.
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But what does Buffett reallyÂ
think about index funds?
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Since the 1960s, Buffett has been investing
through his holding company, Berkshire Hathaway.
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And in that time, the performance of BerkshireÂ
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was more than twice as highÂ
as the S&P 500 - per year!
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If you invested 100 dollars into Berkshire
in the 1960s, that money would be worth over
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a million by now.
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And this guy now recommends buying an S&P
500 index fund before he recommends buying
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shares of his own investmentÂ
company, Berkshire Hathaway?
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In Berkshireâs last annual shareholder meeting,
he said that he ârecommends the S&P 500
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index fund to peopleâ and that he ânever
recommended Berkshire to anybody.â
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And he said that at a time where S&P 500 was
setting yet another all-time high.
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But he was still promoting the idea of just
passively buying into an S&P 500 index fund
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- and he spent more than 15 minutes doing
so.
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And he puts his money where his mouth is.
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He put in his will that most of his money
should be invested in index funds.
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In Berkshireâs 2013 annual letter, Buffett
wrote: âMy advice to the trustee could not
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be more simple: Put 10% of the cash in short-term
government bonds and 90% in a very low-cost
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S&P 500 index fund.â
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But why does Buffett love index funds so much?
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In Berkshire's last annual shareholder meeting,
he explained it like this.
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He started by showing a recent list of the
20 largest companies in the world by market cap.
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On number 1, you will find Apple with a market
cap of over 2 trillion dollars.
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And it goes down to number 20 with a market
cap of 330 billion dollars.
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He then pulled out the same list of the 20
most valuable companies - but from 1989.
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And he pointed out 1 very important thing:
âNone of the 20 from 30 years ago are on
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the present list. None. Zero.â
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He said that âthe world can change in very,
very dramatic ways.â
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He also pointed out that the most valuableÂ
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company in 1989 had a marketÂ
cap of 100 billion dollars.
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The largest company today has a market cap
of over 2 trillion dollars.
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So the largest company in the world has increased
in value from around 100 billion dollars to
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over 2 trillion dollars in just 30 years - so
20x.
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And at the bottom, the number 20 has goneÂ
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from 30 billion dollars to overÂ
330 billion dollars â so 11x.
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The main message here is that the market can
change quickly and companies or industries
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that are dominant today are very unlikely
to stay dominant in a few decades from now.
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And this can be difficult to understand for
newer investors without historical context.
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According to Buffett, there is one very important
key ingredient if you want to invest in the stock
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- and thatâs time.
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Buffett said that âThe main thing to do is
to be aboard the shipâ by investing in
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an index fund.
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Buffett is a long-term investor.
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He thinks in decades and not in years.
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Take Coca Cola for example.
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Buffett started investing in that stock in
1988, so 33 years ago, and he still holds
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Coca Cola today.
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He said that âStocks are the things to own
over time.
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Productivity will increase and stocks will
increase with it.
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There are only a few things you can do wrong.â
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He doesnât just recommend buying index funds
now to make a profit in 1 or 2 years.
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He suggests buying and keeping them for decades
to come.
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And staying invested in index funds is key
here!
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In fact, in the last 20 years, if you would
have stayed fully invested without trying
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to time the market, you would have gotten
an annual return rate of 7.5%.
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If you would have done market timing and missed
out on the 10 best trading days in those 20
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years, your return would have gone down to
3%!
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If you would have missed the 20 best trading
days, your annual return would have been below 1%.
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Another key ingredient in the
stock market investing is diversification.
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One easy way to do that is through an index
fund.
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By buying a diversified basket of hundreds
of stocks with an index fund, you essentially
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minimise your portfolio risk.
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Because your money is spread out across multiple
stocks in multiple industries instead of just
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a handful of stocks.
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So your portfolio is less likely to see huge
volatility.
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If you leave out stock market crashes like
the one in 2020, an S&P 500 index fund usually
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moves up or down less than 1% on any given
day.
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Buffett said that âI would not want to put
all my money in any one company.
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Individual stock prices can fluctuate.
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However, the broader index tends to go up
over time â and with stock market index
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funds, you donât have to pick the winningÂ
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stocks to benefit from the totalÂ
stock marketâs overall gains.â
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But hey - question to you: Do you do stock
picking or do you invest in a diversified way?
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As always - let me know in the comment section
below!
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Ok - fair enough.
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Index funds give you a highÂ
level of diversification.
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But what about performance?
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Buffett said that he thinks that âpeople
who buy index funds, on average, will get
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better results than the people that buy funds
that have higher costs attached to them."
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Heâs referring to passive vs active funds
here and heâs indicating that cheaper passive
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funds will get the average investor a higher
return over time.
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In fact, only 10% of actively managed funds
could beat the S&P 500 as a benchmark over
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a time frame of 15 years.
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And the average stock market return of the
S&P 500 over the last 100 years was around
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8% adjusted for inflation and including dividends.
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I actually made a dedicated video on the risks
of investing in active funds like the ARK
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Innovation Fund.
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If you wanna learn more about it, then check
out the video in the link.
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And to get the most out of index funds, Buffett
suggests investing regularly over a long period
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of time â which is also knownÂ
as dollar-cost averaging.
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He said that "By periodically investing in
an index fund, the know-nothing investor can
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actually out-perform mostÂ
investment professionalsâ.
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Dollar-cost averaging means that you invest
the same, fixed amount of money on a regular
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basis, like once a month.
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And with these regular payments, you invest
into the same index fund.
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If we look at the S&P 500, for example, you
would have invested here, here, here, here,
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here⊠and here.
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And with your fixed amount, you buy a different
amount of shares each time.
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If you wanna know how dollar-cost averaging
performed in a 30 year down-market or against
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perfectly timing the market for 30 years,
then check out the video in the link.
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And whoever knows a little bit about BuffettÂ
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also knows that he doesnâtÂ
like overpaying for stuff.
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The same goes for his investments.
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He said that âI would be very careful about
the costs involved, because all they're doing
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for you is buying that index.â
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Buffett is referring to a fund's total expenseÂ
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ratio which is sometimes alsoÂ
called ongoing charges fee.
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It shows you the operating costs that a fund
provider has for setting up and running a fund.
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These can include management, trading, legal
and auditor fees.
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Because of the high competition in the field,
costs for index funds are becoming cheaper
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and cheaper.
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The average expense ratio for index funds
is about 0.2% today.
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They are so low because there is no expensive
fund manager that you need to pay that picks
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stocks for you.
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You just track an index in an automated way.
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If you go for any of the common and big ETFs
from Blackrock or Vanguard, you can hardly
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do anything wrong from a cost perspective.
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Blackrock's ETFs have an expense ratio of
0.19% on average and Vanguard's ETFs cost
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0.06% on average.
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So, are index funds a good investment for
you?
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A few things to consider: Buffett is a long-term
investor.
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He doesnât like predicting where the market
will move in the next 1 to 2 years.
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Instead, he thinks in decades.
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He doesnât recommend buying an index fund
now to make a profit in a year or so.
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He suggests buying them regularly and keep doing
so for decades to come.
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History has shown that investing in the stock
market through an index fund has been the
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most successful strategy.
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And it comes with some reallyÂ
nice benefits like diversificationÂ
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and low costs.
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If you can stick to those core principles, then
you can set yourself up for financial success.
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But what do you actually think?
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Is Buffett right that index funds are theÂ
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best long-term investmentÂ
for the average investor?
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Is there a point that you donât agree with?
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As always - let me know in the comment section
below.
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I hope that this video could bring some value
to you.
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If you liked what you saw and you wanna support
this channel, then please make sure you subscribe.
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Thank you very much for doing that - and peace!
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