While no one can dispute that billionaire investor Warren Buffett has an enviable understanding of the investment market, his style may not be an example for everyone to follow. Fellow investor Tim Armour explains in a recent op-ed how the “Oracle of Omaha” is wrong about his trust in passive index funds.
Buffett’s long been a fan of the S&P 500 passive index fund, where he can apply his bottom-up strategy of investment, incurring little risk for a modest investment. While this strategy has been helpful in helping Buffett secure his empire. Timothy Armour argues that this strategy could be a disaster in the current market environment, particularly for those who are preparing for retirement. But there is a better way to plan for the future while adding to one’s portfolio.
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Armour points out that the perceived safety in a passive fund isn’t really a guarantee against loss or risk, and in an unkind market they crash just like active funds would. Many people may be unaware of this fact given the unusual length of this bull market giving many investors positive returns. But anticipating the turn to a bear market can make the difference between a retirement in comfort and one defined by financial stress.
Rather than focusing so intently on the safest investment they can find, Armour suggests new investors instead look to how invested managers are investing in their own funds. From accumulated data, Armour has found that managers who invest into their own funds results in consistently higher returns that outperform benchmark indexes.
While it isn’t a way to accurately predict the market, Armour believes that by taking on some risk and seeing which managers are confident in their own fund to do the same he’s been able to average 1,47% above index benchmarks per year after fund expenses are accounted for.
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