How to invest money for beginners can be confusing at best. It’s an important decision with long-term consequences, and everybody seems to have an opinion on the “best” approach. In this article we’ll turn down the noise and listen to the one voice we can trust—Warren Buffett.
Wall Street is noisy. It’s like a craps table in Las Vegas surrounded by conference attendees who have lost count of how many drinks they’ve had.
You’ve got investing apps designed to do one thing—get you to trade. Trade anything. Options, crypto, gold, stocks. They don’t care. As long as you keep trading, the app owners get one step closer to a BDB—a billion-dollar buyout.
You’ve got the media designed to do one thing—get you to watch, listen or click. From pretending that the daily stock market news matters to honking horns or flashing the ticker, they’ll do anything to keep your attention. It keeps the advertising dollars flowing.
You’ve got advisors designed to do one thing—manage your money for a “small” fee. To justify their costs, they’ll create a Rube Goldberg portfolio so complex it makes fluid dynamics seem like child’s play. Add in a little fear-mongering about the next stock market crash, and they’ve convinced you to fork over a percentage of your wealth for the rest of your life.
Warren Buffett on Investing
And then you have Warren Buffett. He eats at McDonalds and drinks Cherry Coke every day. He lives in the same house he bought during the Eisenhower administration. Here’s what he has to say about how both institutions and individuals should invest:
“Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals.”
This advice is not exactly the kind of thing to make drunken craps players cheer. It’s hard to imagine a stock prognosticator blaring a horn on TV after repeating Mr. Buffett’s advice.
On the other hand, it is the best advice you’ll ever get if your goal is to build wealth. And the good news for new investors is that it’s extremely easy to implement.
Here are a few simple investing strategies that anybody can use to implement Mr. Buffett’s investing advice.
In his 2013 letter to Berkshire Hathaway shareholders, Mr. Buffett described how he has advised trustees to manage the money he will leave to his wife: “Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) 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.”
As Steve Jobs believed, simplicity is the ultimate sophistication. Investors can implement the above portfolio with just two Vanguard funds:
- Vanguard 500 Index Fund Admiral Shares (VFIAX)
- Vanguard Short-Term Treasury Index Fund Admiral Shares (VSBSX)
The one thing missing from the 2-Fund Portfolio is direct exposure to international stocks. Some might argue that such exposure is unnecessary. Most of the companies in the S&P 500 index do business all over the world. For those, like myself, who prefer to have more investment in international markets, the 3-Fund Portfolio is a good option.
It’s a simple asset allocation plan consisting of just three asset classes, U.S. stocks, foreign stocks, and U.S. bonds. This portfolio can easily be implemented with just three mutual funds.
As an example, one could implement this investment plan at Vanguard with the following funds:
- Vanguard Total Stock Market Index Fund (VTSMX)
- Vanguard Total International Stock Index Fund (VGTSX)
- Vanguard Total Bond Market Fund (VBMFX)
You can find an excellent description of this simple investment plan at Bogleheads.org.
Target Date Retirement Funds
A target date retirement fund enables investors to get instant diversification with just one mutual fund. These funds take your contributions and split them among multiple stock and bond mutual funds. In addition, there is no need to rebalance your investments as you get closer to retirement. Target date retirement funds adjust the allocation between stocks and bonds as the investor nears retirement.
These types of funds are readily available in most 401(k) and other workplace retirement accounts. They are not all created equal, however. Some cost more than others, and the investment strategies vary from one fund family to the next. As a result, it’s important to check the expense ratio of the fund before investing.
Final Thoughts on How to Invest
As one gains more investing experience, he or she may choose to move away from the above options. Some like to take a more active role, particularly as they study and learn more.
The above options, however, are an excellent way to get started as an investor. And these strategies will also serve well those that chose to stick with them over a lifetime of investing.
There is more to investing than just picking a few funds. First, there’s the question of whether to invest in a taxable account or retirement account. And if one chooses a retirement account, there’s still the question of which type of retirement account. There’s also the question of how much to invest and where to open an investment account.
You’ll find these questions covered in detail in this video: