Picking individual stocks for first time investors is certainly not easy and Warren Buffett agrees. Even if you do not want to trust arguably the best investor of all time, you could also look at the past. This has proven to be the safest and yet most basic way to get started investing in the stock market. It is a way for beginners to discover the power of growth the stock market will provide for you in the long term. History has proven that the S&P produces an average of a 7% return each year. You can achieve this average 7% return by simply investing in a low cost S&P 500 Index fund. What is the S&P 500? The S&P 500 Index consists of the top 500 largest companies of both the NASDAQ and NYSE listings. One of the most common S&P 500 low cost Index funds that Warren Buffet recommends is the Vanguard S&P 500 ETF (VOO) which offers a low expense ratio of only a mere 0.04%.
One thing to keep in mind is that this 7% is not a guarantee set in stone number you get year after year, it is an average. There are going to be some years, like in 2008, where we see an economic downturn due to recession, however you will see this balanced out by stronger than normal growth years, this is where you achieve an average 7%. This is why it is important to understand this needs to be looked at as long term strategy in order for it to be effective. If you are only looking for a short run return where you are going to need the money within a few years, this is not how you want to invest your money. This is due to the fact that recessions can happen at any time and you do not want to get stuck in a position where you have to sell during a pullback from growth. If you are just betting on the short run, it is more of a gamble than an investment.
Warren Buffett explains this exact point of view in his 2013 Berkshire Hathaway Annual Report. “My money, I should add, is where my mouth is: What I advise here is essentially identical to certain instructions I’ve laid out in my will. One bequest provides that cash will be delivered to a trustee for my wife’s benefit. (I have to use cash for individual bequests, because all of my Berkshire shares will be fully distributed to certain philanthropic organizations over the ten years following the closing of my estate.) My advice to the trustee could not be more simple: 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.”
Let’s analyze this quote here. First off, in the beginning, Buffett says that he has put these instructions in his death note showing it could not be anymore clear that he believes in this investing strategy for the long run. And lets be real here, I’m pretty sure if THE Warren Buffett believes in this simple but effective strategy enough to put it in his will, I would say it’s a pretty valid piece of advice. Along with this, history has proven you do not need to pick individual stocks to get started growing your money with the stock market. All it takes is one low cost index fund to get started investing. Notice how I said GET STARTED, I am not recommending never buying individual stocks but to wait until you grasp a better understanding of the stock market to make the purchase of individual stocks or exchange traded funds (ETFs).
Here, I have yet another quote of one of my favorite points of the 2013 Berkshire Hathaway Annual Report to strength my point, “I have good news for these non-professionals: The typical investor doesn’t need this skill. In aggregate, American business has done wonderfully over time and will continue to do so (though, most assuredly, in unpredictable fits and starts). In the 20th Century, the Dow Jones Industrials index advanced from 66 to 11,497, paying a rising stream of dividends to boot. The 21st Century will witness further gains, almost certain to be substantial. The goal of the non-professional should not be to pick winners – neither he nor his “helpers” can do that – but should rather be to own a cross-section of businesses that in aggregate are bound to do well. A low-cost S&P 500 index fund will achieve this goal.”
The stock market is one of the most powerful, if not the most power tool for economic growth in the world. With time and patience you can watch your money grow for years and can eventually be cashed in for retirement or passed down to the next generation of your family, giving them value for years to come. All in all, the stock market can be a hard concept to grasp but by dipping your toes in the water with a low cost S&P index fund, you can begin to obtain the power of growth the stock market provides to people across the world.