How To Pick Stocks, According To Warren Buffett
How To Pick Stocks, According To Warren Buffett
The Advantages of Index Funds
Index funds offer individual investors many advantages over picking stocks. Firstly, index funds offer instant diversification, as it allows you to invest in 500 companies at once. It will take a much longer time (and quite some money) to diversify a portfolio if you choose to buy stocks individually.
Secondly, the 500 companies that comprise the S&P 500 are the top performing companies in the U.S., and thus they offer a pretty good snapshot of the state of the U.S. economy as a whole. Generally speaking, these companies are relatively stable, so they are great for the long haul.
Thirdly, it is easier to manage index fund shares. When you invest in individual stocks, investors are always having to decide when to buy and sell, and oftentimes they anticipate the market wrong and proceed with the transactions at a disadvantageous time. With index fund shares, investors can just follow a time-tested schedule of buying so they don't have to look too much into the guessing game.
Lastly, the buy-and-sell dynamic that comes with choosing individual stocks has trading fees and commissions attached, so that is an additional expense to factor into your investment. In comparison, most fund firms allow access to their S&P 500 index funds for no fee at all.
Structuring a Portfolio
To build a portfolio based on the "very low-cost S&P 500 index fund" that Buffett mentioned in his letter, individual investors have a variety of fund options to choose from. A good one to start with is the Vanguard S&P 500 ETF (ticker symbol VOO) or the Admiral Shares S&P 500 mutual fund (ticker symbol VFIAX). Keep in mind that the latter will have a $3,000 minimum investment requirement.
As an additional investment, you can also choose to invest in short-term government bonds. The Vanguard offers its own Short-Term Government Bond ETF (ticker symbol VGSH), as well as Admiral Shares short term bond mutual fund (ticker symbol VSBSX), which also requires a $3,000 minimum investment.
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