Here’s why Warren Buffett favours simple investing techniques — and isn’t a fan of hedge funds and portfolio managers that promise outsized market gains

What can investors learn from Warren Buffet’s $1 million wager?

What can investors and those saving for retirement take from Buffett's wager? That it’s 100% achievable to build a winning investment portfolio as long as you focus on diversification and keeping fees low. Here are two strategies to put these simple investing techniques into practice.

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Keep fees low

Fees should not be overlooked, as this cost can eat into your returns. In an op-ed for Bloomberg titled “Why I Lost My Bet With Warren Buffett,” Seides agreed with Buffett on the subject of hedge funds’ management fees.

“He is correct that hedge-fund fees are high, and his reasoning is convincing. Fees matter in investing, no doubt about it,” he wrote.

Rather than focus on high-priced hedge funds or expensive mutual funds, investors can use an online brokerage account and select from dozens of low-cost exchange-traded funds (ETFs).

For instance, the Vanguard S&P 500 ETF (TSX:VOO), which follows the S&P 500, has a low expense ratio of 0.03%, which means for every $1,000 invested, you only pay $3 in fees. Similarly, the SPDR S&P 500 ETF Trust (TSX:SPY) tracks the same index and carries an expense ratio of 0.0945%.

Focus on diversification, not cherry-picking a winning stock

Passively managed funds, such as index funds, do not actively trade their basket of equities to try and beat the market. Instead, passive funds allow investors to hold a basket of funds — offering diversification — while allowing investors to capitalize on gains, when the market goes up (or suffer losses, if the market goes down).

These funds are good for investors for three reasons:

• Over time, the stock market consistently rises over time.
• It’s difficult (or nearly impossible) to predict which stocks will outperform and beat the market.
• Fees erode investor returns, so it’s best to keep them as low as possible.

Index funds to invest in as a Canadian investor

Online brokerage accounts offer access to an incredible selection of low-fee ETFs with low-fees and excellent track records. For instance, consider:

• Vanguard Canadian Short-Term Corp Bond IDX ETF (TSX:VSC)
• Vanguard Canada Inc S&P 500 Index EFT (TSX:VFV)
• Vanguard S&P 500 ETF (VOO)
• Vanguard FTSE All Cap Index ETF (TSX:VCN)
• iShares Core S&P 500 ETF (TSX:IVV)
• SPDR S&P 500 ETF Trust (TSX:SPY)
• Vanguard Total Stock Market ETF (TSX:VTI)

Where to buy index funds

To buy cost-effective ETFs, you'll need an online brokerage account. Good options include:

• CIBC Investor’s Edge: Get 100 free trades when you open a CIBC Investor’s Edge account) using promo code EDGE2425. Plus, get $200 or more cash back. Qualifying steps apply.
• Questrade: Move your existing accounts to Questrade, and get a rebate on the transfer fees charged for the switch.

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Bottom line

To find out more about the best ETFs to buy, check out the Money.ca guide on Canadian ETFs. For investors who don’t want to go it alone, consider using a robo-advisor. To learn how robo-advisors work, read the Money.ca guide on the best Canadian robo-advisors.

As for earnings from that legendary $1 million bet? Buffett gave all proceeds to the Omaha, Nebraska-based charity, Girls Inc. Turns out that the biggest winner of Buffett’s bet were the girls.

Sources

1. Bloomberg: Why I lost my bet with Warren Buffett (May 3, 2017)

—with files from Romana King