Let’s be honest, most of us would like to be rich. At the very least we want to be financially secure enough to buy a house, plan for our children’s futures and maybe even enjoy the occasional holiday. But the fact is, very few of us are sure on how to achieve the level of financial independence we crave. One option that seems to have worked very well for Warren Buffett, legendary investor and CEO of Berkshire Hathaway, is a focus on long term investing in the stock market. Buffett’s investment philosophy which revolves around the concept of ‘value investing’ has seen him amass a net worth of around $82 billion (as of July 2019) meaning he is currently the third-wealthiest person on Earth. But this success was not achieved overnight. To quote Buffett himself: ‘Someone’s sitting in the shade today because someone planted a tree a long time ago’
Rome wasn’t built in a day
What he is basically saying is that stable, long term wealth comes from strong financial planning, wise investment decisions and (maybe most importantly) patience. If you seriously want to achieve financial freedom in the future, then now is the time to start. By taking the time to think about how you manage your money today, you could create real financial independence for yourself tomorrow.
We can look at the likes of Warren Buffett and agree that managing our finances and investing in the stock market can certainly pay dividends. But doing this can seem like a daunting task. There are a range of savings and investment options available and choosing the right one is enough to give most of us a headache. The journey of achieving wealth through investing in the stock market can seem almost impossible and can actually result in us losing more money than we gain. To quote Buffett again: ‘Risk comes from not knowing what you’re doing’. Fortunately there is an option for those of us who aren’t stock market experts in the form of Index Tracker Funds.
What on earth is an ‘Index Tracker Fund’?
For those who don’t know, an Index Tracker Fund is essentially an investment fund which attempts to match the performance of an entire index (such as the FTSE 100 or S&P 500) by being made up of the various investments which make up that particular index. For example an Index Tracker Fund which is focused on the FTSE 100 would be made up of the top 100 companies listed in the FTSE 100. This allows investors to put their money into a wide range of investments with relative ease and very little requirement for knowledge about financial markets.
Warren Buffett has long been a fan of this approach and has often advised both individual and institutional investors alike to stick with low-cost Index Funds rather than attempting to manage their own investment portfolios, a process which can often be costly and time consuming. In fact back in 2014, Buffett said he planned to put 90% of the money he leaves to his wife into an S&P 500 index fund and 10% into government bonds. This is because Buffett’s entire approach to wealth is all about the long term. Whilst the value of more volatile investments can increase much faster, they also tend to be far more risky and often lead to losses which can be costly to recover from.
“Our favourite holding period is forever.” – Warren Buffett
If we’re going to invest like Warren Buffett then we need to think about finances the same way he does. Risk is an unavoidable part of investing, but we can choose how much risk we expose ourselves to. By looking at our investments over the long term rather hopping from one up and coming trend to the next we spread our exposure over a much longer period of time. Whilst it is true that large indexes fluctuate, over the long run they have always eventually gone up. Over the last 10 years the FTSE 100 has risen by 59.5%, the Dow Jones 186% and the S&P 500 by around 240% (July 2009 to July 2019). Most investors, if they are being honest, would admit that consistently achieving growth similar to these figures is not easily done.
How to invest in Index Tracker Funds
If you now understand the benefits of investing in an Index Tracker Fund over the long term, then the next question you may be asking yourself is how to go about it. The first step is to find a reliable broker and open up an account with them; this can be in either a Stocks and Shares ISA (a good option for protecting against capital gains tax) or a standard Share Account. A quick google search will present you with a range of options, but make sure to carefully read about their fees and look at a few options before deciding. Some brokers will charge you a percentage based fee on fund holdings which will increase as your holdings do. This can end up costing you a pretty penny if your investments grow the way you want them to. Fortunately there are also brokers who stick to fixed account fees which won’t go any higher as the value of your investments goes up.
Once you have chosen a broker, next decide which Index Tracker Funds you would like to buy. A helpful list of Index Tracker Funds which have been chosen by expert analysts is available from The Share Centre. Once you’ve got your account open and you’ve decided which Index Tracker Funds to invest in, we recommend setting a monthly direct debit with a regular purchase instruction. The benefits of automated savings are well documented as your money is invested without you having the temptation to spend it on more frivolous fancies. As well as this, by buying into your chosen fund at regular intervals over time you reduce your exposure to market fluctuations. Follow these steps and you can be on your way to following in the footsteps of The Oracle of Omaha himself.