Nowadays, it is impossible to visit any online finance forum without reading how someone lost 40% in Bitcoin, 60% on an NFT, 80% in a SPAC, etc.
I am not sure why people take such risks with their hard-earned money. When someone wants a root canal procedure, they go to a dentist. But when it comes to investing, everyone thinks they are experts and can do it all themselves.
It is harder to beat the market than perform a root canal (sorry, dentists!). You are up against some of the world’s best-paid people, massive data and computing power, sophisticated algorithms, etc.
So does the average person have any chance of winning? Yes! There is a way to beat most of the sophisticated investors out there. And it is surprisingly simple.
Any fool can make things more complex.
It takes a touch of genius, and a lot of courage, to move in the opposite direction.
Einstein
What would Buffett do?
Warren Buffett is considered one of the greatest investors of all time. He believes that a simple investment in a low-cost index fund (like Vanguard S&P 500 ETF: VOO) can yield better returns than most investing strategies.
In 2008 he issued a challenge to prove that simple investing works best. A hedge fund – Protégé Partners – accepted the challenge, and the two parties placed a million-dollar bet.
As you can imagine, Buffett ended up winning the bet. The S&P 500 fund gained 126% over the next ten years. The five hedge funds, picked by Protégé Partners, gained an average of about 36%.
There is a tendency to confuse complexity and jargon with good investing. But numerous studies have shown that most funds struggle to beat the simple S&P 500 index.
Buffett is such a firm believer in this strategy that he wants most of his estate invested in VOO.
All you have to do is save a portion of your salary every month and buy VOO fund. That’s it. It does not have to be any more complicated than that.
VOO: The best way to invest
The Vanguard S&P 500 ETF (VOO) invests in the top 500 American companies. It does not try to predict which companies will do well. Instead, it just invests in all of them.
So, when you invest in VOO, you automatically own the best companies in America, like Apple, Amazon, Microsoft, Tesla, etc.
Investing in VOO has several benefits:
- Great performance – it does better than about 80% of the funds.
- Less risky because it invests in the largest companies in America. As long as the American economy does well, VOO will do well.
- Covers all types of industries, so it is well-diversified.
- Offers international exposure (a lot of American companies are global).
- Almost free – expense ratio is 0.03%. This means 99.97% of your money is invested, and only 0.03% goes towards fees and expenses.
Related Article: The simple but ignored secret of Warren Buffett’s wealth
Your mileage may vary
What if you still want to invest in individual stocks / crypto / NFTs / options / etc.? Well, there is a less risky way to do that.
Firstly, invest the bulk of your money (say 90%) in VOO. Make sure you regularly invest (with every paycheck). That will help with dollar-cost averaging.
Secondly, have a long-term perspective. Markets may go up or down in the short run, but they tend to go up over the long run. Also, you benefit from the magic of compounding.
Lastly, you can invest the remaining 10% in individual stocks, crypto, NFTs, options, or whatever else catches your fancy.
As with anything else, this strategy does not work in every situation. If you are older or closer to retirement, you should not have high exposure to stocks.
Alternatively, if you are a risk-taker, you may decide to go 80-20 instead of 90-10. Or, if you are knowledgeable about other investments like real estate, you may want to invest more in that.
This strategy is best suited for time billionaires. At best, the 10% you invest in risky assets will go up. At worst, you will only lose only 10% of your money (and gain some valuable investing lessons in return).
Happy investing…
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