Warren Buffett says this simple mistake has cost investors more than $100 billion

[mahatmakanejeeves]

Oddly, this is not clickbait.

Warren Buffett says this simple mistake has cost investors more than $100 billion

By Jonnelle Marte February 27 at 1:37 PM

Billionaire Warren Buffett has some wise words for investors: Stop throwing money away on bad advice.

In his annual letter to shareholders released over the weekend, the Berkshire Hathaway chief executive bashed active fund managers who charge higher fees on the promise that they can do better than the broader market. Buffett said most savers would be better off putting their money in low-cost index funds over the long term, and he estimated that investors wasted roughly $100 billion over the past decade on unnecessary fees. ... The “massive fees” charged by active fund managers — who often promise to outperform the broader market — can leave savers worse off than if they had simply used a low-cost index fund that tracks a stock-market index, Buffett warned.

{Saving for retirement? Who’s working in your best interest?}

To illustrate his argument, the “Oracle of Omaha” laid out the results of a challenge he presented to fund managers more than a decade ago. In 2005, he bet $500,000 that no investment professional could find five hedge funds that would match the performance of an index fund tracking the Standard & Poor’s 500-stock index over the long run. Only one fund manager stepped up to the plate: Ted Seides, a co-manager of the investment firm Protégé Partners.

Over the first nine years of the challenge, the five hedge funds chosen by Seides delivered an average 2.2. percent a year. The S&P 500 funds picked by Buffett returned an average 7.1 percent a year. “That means $1 million invested in those [hedge] funds would have gained $220,000. The index fund would meanwhile have gained $854,000,” Buffett wrote. ... While some of the funds chosen by Seides showed fewer losses than the S&P 500 index fund in some years or gained more than the index in other years, the index fund outshone them all over the long run:



(From the Berkshire Hathaway 2016 shareholder letter.)
....

Jonnelle Marte is a reporter covering personal finance. She was previously a writer for MarketWatch and the Wall Street Journal.  Follow @jonnelle

[spooky3]

1. John Bogle of Vanguard has been saying this for years.

[Warpy]

2. Index funds rise and fall with the market, so if the market as a whole falls

the index fund will fall in the same proportion. Notice the first line, 2008, where the index fund did the poorest.

However, it also posted the strongest gains over the period, while the fund itself is low cost because it lacks the aggressive micro managers the other funds boast. The smaller the investor, the more risk he runs of having his money eaten up by fees during any lean year, while the index funds are much lower and the loss reflects what happened across the market.

[brooklynite]

3. We put a significant share of our funds in Vanguard, primarily because of the low fees.

However, we've given three separate managed fund firms a pot of money to see how well they can do and how it compares to our self-managed assets.

[mahatmakanejeeves]

4. I have Vanguard funds too. Also, I foolishly keep thinking that

I can catch that falling knife **right** as it hits bottom.

Every now and then I hit it right, but far too often I get to learn the hard way that I guessed wrong again. Like a moth to the flame, though....