Investing in index funds or individual stocks? Warren Buffett’s advice

Warren Buffett is probably the most famous figure in the history of financial markets and investments. He became an investor at the age of 11 and developed his personal approach to trading making him the owner of numerous companies listed on the Fortune 500. Warren Buffett’s current net worth easily exceeds 100 billion US dollars which means that he is the 9th richest person alive in the world. 

Due to his tremendous success in investing and trading, many finance enthusiasts look forward to learning from Buffett. He is famous for providing numerous tips and recommendations on how to invest in various financial markets. He is one of the most successful stock traders, however, his investment strategy is quite a surprise to many. Warren Buffett votes against trading individual stocks and cheers for picking index funds instead. 

Buffett’s advice to his wife

Warren Buffett released his annual letter to shareholders in 2013 where he provides guidelines on how to manage his estate for his trustee. He puts forward clear instructions on the investment strategy that his wife should follow in case of her husband’s death. According to him, a trustee should invest only 10 percent of the existing cash holdings in short-term government bonds and the rest of it in the extremely low-cost S&P 500 index fund. Warren Buffett actively advocates for the strategy and believes that it is superior to all the pension funds or highly experienced investors who trade otherwise.  Furthermore, it was not a one-time strategy suggestion from Warren Buffett. Warren Buffet who is also known for a position as a Forex trader, advises newbie investors to get more information about Forex trading basics for beginners, which allows newcomers to get familiar with the basic things in FX trading and generate strategy. He kept on repeating the same advice throughout the time. In 2016, he expressed the same exact opinion. Whenever someone asks him how an average investor acquires his or her wealth through stock trading he responds that a person should invest in an S&P index fund and wait for 50 years. 

Ironically, Warren Buffett does not recommend holding a single stock even if it is Berkshire Hathaway, his own company. He is a strong advocate of index fund-rich investment portfolios, especially the S&P mutual fund. Buffet believes that the trading stock index, whether it is S&P 500 or Fidelity 500 index fund, is much smarter than investing in individual stocks of the top-performing companies in the world. Apart from this advice, Buffett has his own view on value investing, which we will cover in the below paragraph. 

Also Read: Stock Market Tips and Best Stocks To Buy In 2021

Value investing and portfolio structures

If you are a fan of stock trading and are not eager to invest in index funds then follow the value investment strategy of Warren Buffett and his company. Despite the fact that Buffett personally believes in the superiority of mutual funds over individual stocks, his company Berkshire Hathaway has been developing a portfolio of billions of dollars of individual stock investments. However, all stock acquisitions follow value investment principles. 

Value investing means that an investor should focus on the intrinsic value of the company instead of watching the fluctuations of stock prices on the market and hence invest in competitive companies with higher true value. This trading philosophy was first developed by the mentor and instructor of Warren Buffett – Benjamin Graham. This value investment formula was firmly supported by Berkshire Hathaway. That is why you will observe the stocks of Wells Fargo, Coca-Cola, and American Express within the stock portfolio of the company. 

However, one thing should be considered when implementing value investing in your daily trading life. In contrast to Berkshire Hathaway, which is a huge corporation able to make massive investments, individual investors have lesser capital and thus fewer opportunities to mimic the success of Buffett’s investments. Thus it is important to assess the risk profile for your trades to estimate how much of the losses you can absorb financially. In the long run, Buffett’s advice on both index fund trading and value investment will most probably be profitable, however, it might scare away short-term traders. 

For more insights on value investment strategy, Kailash Concepts, an investment research firm in the US, shared their view on value investing vs momentum investing which you might find interesting.

For low-budget investors, the best approach is to leave aside high-value company stocks and instead focus on mutual funds or short-term government bonds as Warren Buffett suggested multiple times. Some of the best starting points are Vanguard S&P ETF or ticker symbol VFIAX. The minimum investment requirements for these assets would be below 3,000 US dollars making it way more affordable than the rest of the instruments within the same class.