Wednesday, July 8, 2015

best way to invest

Investing pros John Bogle, Warren Buffett, and Charlie Munger all agree on the best way for the average person to invest

Successful investing is not a complicated matter. In fact, it's all about common sense, emphasizes founder and former CEO of the Vanguard Mutual Fund Group, John C. Bogle, in "The Little Book of Common Sense Investing."
There is a winning strategy when it comes to playing the stock market game, Bogle says, and it boils down to one simple strategy: investing in index funds.
He's referring to the "classic index fund," which he defines as broadly diversified, holding many, many stocks, and operating with minimal expenses and high tax efficiency.
"It is a simple concept that guarantees you will win the investment game played by most other investors who — as a group — are guaranteed to lose," Bogle writes.
Investing in index funds works for two main reasons, he says: They're broadly diversified, which eliminates individual stock risk, and they're low cost.
It may not be as glamorous as trying to beat the market — Bogle equates this strategy to shooting par during each round of the stock market game — but it works, he writes, and hotshot investors like Warren Buffett and Charlie Munger agree with him.
"A low-cost index fund is the most sensible equity investment for the great majority of investors," Buffett told Bogle in "The Little Book of Common Sense Investing." By periodically investing in an index fund, the know-nothing investor can actually out-perform most investment professionals."
He wrote to shareholders of his company, Berkshire Hathaway, in 2014: "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."
Munger, Buffett's partner at Berkshire Hathaway, warns against complex investing, which inevitably gets expensive after hiring financial planners and consultants, and tells Bogle in "The Little Book of Common Sense Investing" to opt for simplicity:
At large charitable foundations in the recent years there has been a drift towards more complexity ... There is one thing sure about all this complexity, the total cost of all the investment management, plus the frictional costs of fairly often getting in and out of many large investment positions, can easily reach 3% of foundation net worth per annum ...
The wiser choice is to dispense with the consultants and reduce the investment turnover, by changing to indexed investment in equities.
It's important to note that not all index funds are necessarily low-cost.
"All index funds are not created equal," Bogle emphasizes. "Some have miniscule expense ratios; others have expense ratios that surpass the bounds of reason. Some are no-load funds, but nearly a third, have substantial front-end loads ... Others entail the payment of a standard brokerage commission."
One option for investors looking to follow the advice of the pros, of course, is to open an account online with Bogle's company, Vanguard, and invest in their index mutual funds, which charge relatively low fees for investing directly (an average of 0.13%).

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get wealthy

The single most effective way to get rich

warren buffettGetty Images / Michael BucknerRenowned investor Warren Buffett.
Contrary to popular belief, you don't have to be an expert about personal finance to get rich.
You don't need to use fancy economic jargon or know this year's "hottest stock." You don't have to come from an affluent family, and you don't even have to earn a massive paycheck.
For most people, it all boils down to one thing: investing.
"On average, millionaires invest 20% of their household income each year. Their wealth isn't measured by the amount they make each year, but by how they've saved and invested over time," writes Ramit Sethi in his New York Times bestseller, "I Will Teach You To Be Rich."
"In other words, a project manager could earn $50,000 per year and be richer than a doctor earning $250,000 per year — if the project manager has a higher net worth by saving and investing more over time."
Sethi gives an example of the power of investing just $10 per week:
After five years (assuming an average 8% return), you would have $3,295, and after 10 years, you would have $8,136. And that comes from simply setting aside a little over a dollar a day.
Putting away $50 a week would result in $16,473 after five years and $40,678 after 10 years. Imagine how much money would accumulate if you set aside a bit more each week, and did that for several years.
The earlier you start, the better.
This chart from JP Morgan Asset Management, which shows the power of taking advantage of compound interest from an early age, explains why it's so important to get started now and invest consistently, even if you think you don't have enough money to make a difference:
chJP Morgan Asset Management
You don't need to be rich to invest, yet so many of us fail to get started managing our money because we're intimidated or don't know where to start. Fear of losing money is also a common concern: "That's fair," writes Sethi, "Especially after market losses during the global financial crisis, but you need to take a long-term view. Despite wild rides in the stock market, with a long term perspective, the best thing you can do is start investing early."
Investing is not as complicated or daunting as we make it out to be. The simplest starting point is to invest in your employer's 401(k) plan; make sure to take full advantage of your company's 401(k) match if they offer one.
Next, consider contributing money towards a Roth IRA or traditional IRA, individual retirement accounts with different contribution limits and tax structures (which one you can use depends on your income). If you still have money left over and are hungry to continue investing, you can research low-cost index funds, which Warren Buffett recommends, and look into the online investment platforms known as "robo-advisers."

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