So you want to get rich and be comfortable in retirement, what’s the secret? Buffett has the answer in a single sentence, and every word he stated matters: consistently buy an S&P 500 low cost index fund, keep buying it through thick and thin, and especially thin.
Buffett often speaks in simple terms that are easily understood but doesn’t explain the deep thought and logic that led to his conclusions. In this one short sentence, he covers so much.
100 Years Of Massive Wealth Creation
Over the course of a century, the Dow Jones went from 66 to 11,497. That enormous wealth generation stemmed from the success of American business. But critically Buffett notes that it’s a mistake to try to pick the best companies – most people are ill-equipped to do so, he says, and observes that even he makes mistakes. That’s quite an admission from a maestro who spends pretty much all day every day reading with a view to spotting a single opportunity.
The larger point is that the S&P 500 comprises the best companies in America. A bet on the S&P 500 is a bet on American business that has a proven track record of success. And yet the S&P 500 is not a static list of companies. According to Quantified Strategies
“As of 2014, about 186 changes have been made to the composition of the index since its creation in 1957, so over 686 companies have ever made it to the S&P 500 index over the years.”
Why try to pick the winners and losers when you can own the whole basket, and continue to own it when the bad apples are replaced by better ones?
Every Month, Every Year, and Never Stop
A key nugget in Buffett’s sentence is his first word, consistently. If you’re going to own the S&P 500, buy through thick and thin, especially thin he says. Each and every month, without fail, buy some shares.
When the newspapers are making you want to rush to sell, that’s precisely the time to stay the course and buy the dip. Those purchases in tough times will reward you most in better times.
Time and again, top money managers advocate this practice but the slow and steady approach appeals to few. Picking fast winners is so much more sexy, yet few reap the rewards of those bets. Even Buffett has said he really only has had one great idea every 5 years or so, and absent those great bets his record, he claims, might be quite modest.
Pay Fees, Pay The Price
Perhaps most importantly of all, he advocates for a low-fee index fund. If you want to select a low-fee fund, one of the best is by Vanguard, symbol VOO. Whereas the more popularly known SPY has an expense ratio of 0.09%, VOO has an expense ratio of just 0.03%. For every million dollars invested, you pay just $300.
Now compare that to a money manager who charges you an additional 1% on top of the expense ratios, that would translate to an additional $10,000 annually. Imagine a worse case scenario where the market doesn’t go up over 25 years, $250,000 of the $1,000,000 goes to fees. Now imagine those who are put in mutual funds that charge 1% in addition to the wealth manager charging 1% and you see that over a 40 year investing period, 80% of the originally invested capital is lost to fees.
The bottom line is to build up a healthy nest-egg for retirement, the slow and steady approach is the way to go, and Buffett has prescribed the solution. The problem for most people? It’s plain boring. If you want excitement, consider a fun portfolio and a retirement portfolio so you get to enjoy the best of both worlds: stock picking for fast returns and slow investing for retirement riches.