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Warren Buffett: 5 Investing Tips for Passive Investors

The Motley Fool logo The Motley Fool 11/11/2020 Aditya Raghunath
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Warren Buffett has been one of the most successful investors in the last five decades. The Oracle of Omaha has managed to outpace the broader markets consistently, and he has always been vocal about investing in equities. Here we look at five investing tips by Warren Buffett for people who do not follow the stock market.

Invest in the S&P 500

Warren Buffett is a huge fan of investing in index funds such as the S&P 500, which gives you exposure to top companies in the United States. Investors who do not have the time or expertise to pick individual stocks can passively invest in ETFs to build long-term wealth.

Warren Buffett has in fact stated that according to his will, 90% of his personal wealth should be invested in the S&P 500 Index, while the remaining will be placed in short-term U.S. treasuries.

Canadians looking to gain exposure to the S&P 500 can invest in the iShares Core S&P 500 Index ETF (TSX:XSP), which is a hedged index fund, protecting investors from currency fluctuations as well.

Try to lower asset-management fees

Warren Buffett famously said, “When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients.”

So, while investing in index funds, look at ETFs with the lowest expense ratio, allowing additional capital to go into your investment. The XSP ETF has a management fee of 0.09% and a management expense ratio of 0.1%.

Pay off credit card debt before you invest

Warren Buffett told a story of an acquaintance who sought his investing advice. Buffett asked the person if she had credit card debt. The individual had debt with an annual percentage rate of 18%. To this Buffett replied the interest savings from paying off credit card debt would be much higher than what could be earned via an investment. He actually said, “I don’t know how to make 18%.”

However, the Warren Buffett-owned Berkshire Hathaway has generated annual returns of 20% in the last five-and-a-half decades prior to the pandemic. But this example is the exception and not the rule, which also suggests you should not run after assets that generate exponential returns, as they also carry significant risks.

Focus on dollar-cost averaging

Warren Buffett advises investors to focus on dollar-cost averaging, as it is impossible to time the markets. So, it makes sense to invest regularly at fixed intervals no matter the state of the stock market.

Even when you invest in ETFs such as the XSP, Buffett confirms, “Don’t put your money all at once; do it over a period of time.”

Invest for the long term

Whether you are an active investor or a passive one, you need to hold your investments for the long term. This buy and hold strategy is the most effective way to create substantial wealth.

For example, a person who invests $300 a month for 35 years will see their contributions turn into $1 million, given annual returns of 7%.

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The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), and short December 2020 $210 calls on Berkshire Hathaway (B shares). Fool contributor Aditya Raghunath has no position in any of the stocks mentioned.

The post Warren Buffett: 5 Investing Tips for Passive Investors appeared first on The Motley Fool Canada.


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