The Only Investment Warren Buffett Recommends for Most People
If Warren Buffett – one of the most successful investors of all time – speaks highly of an investment method or tool, it has to be something worth noting. Over time, Buffett has shared invaluable investment wisdom with us through his letters to shareholders and speeches. One, in particular, stands out. The 90/10 investment strategy. The ‘Wizard of Omaha’ mentioned this strategy in his letter to Berkshire Hathaway shareholders in 2013.
Buffett explained in that letter how he wants this 90/10 strategy to be followed for his wife’s inheritance investment once he is gone from this world.
“My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund…,” Buffett wrote. “I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers,” he added.
Buffett has been saying this for years – “Invest 90% of your money in a low-cost S&P 500 index fund“. This advice is not just for US investors, but the idea is equally relevant in markets like India.
What is an S&P 500 index fund and why is it Buffett’s first choice?
The S&P 500 is an index of the 500 largest companies in the US, including giants like Apple, Microsoft and Google. When Buffett talks about an S&P 500 index fund, he is actually talking about an investment that offers diversification at low costs and gives stability over the long term.
The legendary investor believes that it is very difficult for ordinary investors, and even professionals, to beat the market. Therefore, he suggests that investors put their money in a fund that tracks the entire market and let their money compound on its own. According to him, expensive fund managers or active strategies fail to give better returns than the market in the long run.
Indian alternatives to S&P 500 index funds: What should Indian investors choose?
There are options available for investors from India also to either invest in a fund that directly tracks S&P 500 or invest in index funds in India which are tracking BSE 500 or Nifty 500.
For example – Motilal Oswal S&P 500 Index Fund is an option for those who want to invest directly in a fund tracking the S&P 500 index. The fund is one of the most popular options for investing in the US market from India.
On the other hand, if an investor wants to adopt Buffett’s index investing philosophy by staying only in the Indian market, then index funds like Motilal Oswal Nifty 500 Index Fund, HDFC BSE 500 Index Fund, SBI Nifty 500 Index Fund, are suitable. We have selected these based on one key criterion — they offer diversified market exposure across the entire Indian equity market, much like how the S&P 500 index fund does in the US. As always, it’s advisable to consult a financial advisor before making an investment decision.
Today, investors in India have a wealth of index investing options at both domestic and global levels and they just need to choose the right option as per their investment strategy and risk profile.
The concept of ‘low-cost’ funds and India Vs US
When Buffett talks about ‘low-cost’, he is referring to the expense ratio. In the US, funds like Vanguard and Fidelity often have an expense ratio of less than 0.04%. This means that the investor has to pay almost zero fees on his investment.
In India, even though these costs are not that low, index funds are still much cheaper than active mutual funds. The expense ratio of index funds in India is usually between 0.3% to 0.5%. Indian capital market watchdog SEBI (Securities and Exchange Board of India) has set a limit on TER (Total Expense Ratio) on index mutual funds. The market regulator caps the TER for index funds and exchange-traded funds (ETFs) at 1% of the scheme’s daily net assets.
Buffett’s other investment strategies and their Indian context
1. Long-term investing
Buffett always says that the easiest way to succeed in the market is: “Stay in good businesses for a long time.” The same principle can be applied in India through an SIP (systematic investment plan) in an index fund that invests in bluechip stocks. When you invest for a long period of time, the magic of compounding works over time.
2. SIP and rupee-cost averaging
Buffett is a big supporter of ‘dollar cost averaging’. In India, it can be applied to SIP investment every month. This reduces the impact of market volatility and balances the average purchase price.
3. Diversification
Be it S&P 500 or Nifty 500 – both the indices give the investor exposure to different sectors and companies. This limits the impact on the portfolio even if one company or sector falls.
4. Avoid expensive active funds
Buffett believes that investing in expensive active funds is a terrible mistake, especially when a less expensive index fund can do the same job. In India too, many active funds charge high expense ratios but do not outperform all others.
The future of index funds in India
Index funds may have had a slow start in India, but now their popularity is growing rapidly. The number of investors investing in ETFs and passive funds is increasing.
SEBI has imposed strict rules on TER to protect the interests of investors, due to which more and more people are getting attracted to cheap and transparent funds. AMFI and other regulatory bodies are also contributing to spreading financial literacy.
Importance of Buffett’s strategy for Indian investors
Today, when the market is full of new investment products, IPOs and ‘get-rich-quick’ schemes, Buffett’s simple but effective advice becomes even more relevant. If an investor wisely starts an SIP in a low-cost index fund and continues investing without panicking for 10-15 years, he can easily create wealth.
Indian investors need to understand that successful investing is not achieved by chasing flashy returns, but by discipline, simplicity and cost-awareness. This is what Warren Buffett’s strategy teaches.
Summing up…
Buffett has repeatedly said that ordinary investors do not need complex strategies. All they need to do is put their money in a low-cost index fund, invest regularly and be patient.
Disclaimer: The purpose of this article is only to share interesting charts, data points and thought-provoking opinions. It is NOT a recommendation. If you wish to consider an investment, you are strongly advised to consult your advisor. This article is strictly for educative purposes only.