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The Best Advice On Investments You Will Ever Get

Updated: Feb 20, 2020

Everybody has heard about Warren Buffett and Berkshire Hathaway, and his amazing ability to compound rates of return at almost 20% a year since 1965. That does not seem much right? For the sake of reasoning if you have invested 1000 euros and had that rate of return you will have 22,643,802.26€. This man must have done something right. The truth is that he is one of a kind and it is very hard to achieve such a return on investment. Despite this he already gives us the recipe for most to succeed. In one of his famous letters to shareholders he rights this:

“My advice to the trustee couldn't be more simpler: 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.”

And the man put his Money where his mouth is, in 2008 he had made a bet against the hedge fund industry, believing that the return on average of five funds of funds would underperform the S&P500 index. The difference was for the 10 year period of 22% for the active funds managers and 85.4% for the broad based low cost index fund of the S&P500 (Vanguard).

The reason of this bet was his intention to prove that costs of actively managed funds will drag your performance in at least the fees they collect (related to the S&P500 index). In other words, do not buy actively managed funds because they will certainly underperform the index fund.

The truth is that there are some risks in investing in the stock market, but if you are planning as we are to the long run (at least ten years), there is no better option. Some will argue that real estate is a better option or that be an entrepreneur will make you wealthier much sooner. The evidence and historical data say otherwise. There is nothing wrong on trying this approach. But you will likely underperform and we are not even considering the time you will need to manage any of those options against the time you will need to manage a portfolio on index funds.

The next question is which one? Should I follow Warren Buffet advice or try an even broader approach? If you go for the total stock market etf at vanguard, performance in the last 10 years is 9,02% (not bad at all) but when you compare it to the S&P500:


Ok Mr. Fergus Srooge but that is all to much risky to me and i will keep my Money in the bank where it is so much safe. I will now introduce to you the second most evil force to mankind ever faced, only second toTaxes, and that is Inflation.

In a very resumed way things get more expensive year after year (In Europe they are trying to keep it at 2%) and if the Money on the bank has a low or none return you will loose Money.

A very simple example. One bread costs 1 € at todays price. Assuming we have a 1000 € in our bank we can buy 1000 pieces of bread. Now watch what happens when you compound inflation:

In 30 years that bread will cost 1,81 €, only alowying you to buy 552 peaces of bread. It hurts right? This should be why Albert Einstein famously said “Compound interest is the 8th wonder of the world. He who understands it, earns it; he who doesn’t, pays it.”

As we said in What is the Rat Race and how to Run from It, the strategie is simple and as we showed you above quite achiveble: Buy an ETF or an Index Fund of the S&P500, the lowest the fees the better. And one more thing keep adding to it regurly. This will smooth the ride, because bad days are to be expected, sometimes very ugly ones but in the long run Einstein and Buffet are right for sure.

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