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In 2007, Warren Buffett made a daring move. The legendary investor bet $ 1 million that could defeat a simple, no-frills S&P 500 index fund a selection of hand-chosen hedge funds in 10 years. Experts manage the hedge funds and for this they charge a low fees. Many see them as the pinnacle of advanced investing.
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Buffett, however, believed that something like an index fund, which simply follows the performance of the top 500 companies in the US, would do better in the long term.
What was the result? Buffett comfortably won the bet. In the decade, the Vanguard S&P 500 index fund, which it selected, yielded an amazing return of 125.8%, while the returns of the hedge funds ranged from 2.8% to 87.7%. How can this “normal” investment approach surpass some of the most experienced financial spirits?
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Warren Buffett has argued that cheap index funds are a sensible investment option for most people for most people. An Index Fund enables investors to possess part of each company in the index instead of trying to time the market or to identify the following large shares.
It is a detached strategy that only replicates the general performance of the market. As Buffett said, “You don’t have to do that, you just have to lean back and let the American industry do for you.”
This may sound too easy to be effective, especially in comparison with the complex strategies used by hedge funds. However, Buffett has always said that keeping the costs low is the key to successful investing. Hedge funds usually count a lot – about 2% of your money every year, plus 20% of all the profit they make. These high costs can be reduced in your income over time.
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The Vanguard Fund Buffett, on the other hand, chose a cost ratio of only 0.04%, which means that almost all the growth of the investment in the pocket of the investor remained. “Costs are important when investing, no doubt in it,” said Ted Seids, the hedge fund manager who accepted Buffett’s bet. He later admitted that Buffett was right about the impact of high costs.
