When it comes to investing, there are generally two ways to go about it. Active investing, as the name suggests, means actively buying and selling stocks in order to outperform the overall market. This can take many forms: growth investing, value investing, and even speculative styles such as technical analysis and day trading may be considered active investing.
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Next is passive investing. Passive investors try to take as little action as possible by buying and holding a broadly diversified portfolio of stocks in order to imitate the market rather than beat it. The easiest way to pursue passive investing is through so-called index funds. An index fund is a mutual fund or exchange-traded fund (ETF) that models its portfolio after a major index, such as the S&P 500, which tracks the 500 largest publicly traded companies. US company.
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Does Buffett invest in index funds?
Legendary investor and Berkshire Hathaway billionaire Warren Buffett is clearly not a passive investor. As a hedge fund manager, he bought the struggling textile manufacturer Berkshire and built it into one of the world's largest and most successful holding companies.
You might be surprised to learn that Buffett is actually a big fan of index funds. Berkshire Hathaway also owns a minority stake, but it's only a small portion of the overall portfolio. More importantly, Mr. Buffett has consistently recommended that it is in the best interest of non-professional investors to invest in low-cost index funds, and the funds Mr. Buffett leaves behind in the form of index funds. It is even reported that his heirs will inherit most of the money.
Are index funds effective?
Buffett certainly thinks so, and it's hard to refute the Oracle of Omaha, but is there any evidence that he's right about passive investing? Financial scholars have shown that there is a wealth of empirical evidence that this is true, and one of the best examples comes from Buffett himself.
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In 2008, Buffett made a $1 million bet with a hedge fund manager that a passive Vanguard index fund would outperform five carefully selected actively managed investment funds over a 10-year period. Index funds won, but they were just one step away. While five actively managed funds returned 36.3% after fees over 10 years, the index fund returned a whopping 125% despite doing almost nothing.
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