Warren Buffett is both famous and infamous. My husband showed me an article where Warren Buffett was criticized for saying that he will leave his wife a lump sum of cash. The money will be handled by a trustee who is to put 10% into government bonds and 90% into an index fund.
An index fund buys stocks in companies that have been listed on the index. Warren Buffett likes the Standard and Poor 500 I guess because it lists 500 companies. If you were to buy 1 share in every stock listed in the S&P 500 you would have to pay $5000 in trading fees (adding about $10 to each share you buy) and you would spend about $107,000 at today's prices for those stocks in addition to the trading fees.
The index funds buy in such large volumes that their trading fees are a very, very small part of the costs of their shares. The amount of work you would have to do to track the market would be enormous. Buying shares in an index fund saves you both time and money. This is why Warren Buffett's advice makes so much sense.
We can't all invest like Warren Buffett. He buys whole companies and turns them into money-making machines. And the secret to Warren Buffett's success is simple: he invests other people's money. When you read that Warren Buffett's first business was a pinball machine, you should keep reading the story. The pinball machine did not make him wealthy. He simply built a reputation for making money that led other people to trust him with their money.
Since we cannot all be like Warren Buffett, I just want to be like his wife. I want a trust fund that is 90% Standard and Poor 500 index fund shares and 10% government bonds.
The other way Warren Buffett makes money is by selling options contracts on stocks that he controls. The option contract is just a way to guarantee to someone that they can buy shares of a stock at a fixed price. If the market drops below the price on the contract the buyer walks away but you keep the option fee.
That may sound very simple too but before you start reading up on options broker reviewshttp://www.optionstrading.org/reviews/ think about the $534 that Warren Buffett lost on options contracts a few years ago. Even he isn't always right. In fact, Mr. Buffett has been quoted as saying that derivatives (including options) are "weapons of financial mass destruction". I don't know what kind they were, but derivatives based on spooky home mortgages were blamed for the last big recession in America.
If investing is really this tricky, then I want to be the beneficiary of the smoothest possible investing strategy. And that is to put most of your money in an index fund and leave it there until you absolutely need it.
Personal thoughts on spending and saving money.
