Mr Buffett's bet in 2007 that an S&P 500 index fund would beat a basket of hedge funds has almost proved him right. if anything, this really proves that Costs matter when it comes to investing. Most 'experts' are hard pushed to consistently beat "average" returns due to competition in markets, and all information already being factored into the price of a stock.
But what of the next 10 years? How should investors invest over the next decade?
It should be more of the same, in truth, but I would suggest considering a few small tweaks to enhance returns.
Mr B was right in his bet that core market index funds will outperform active mutual funds or indeed hedge funds over the long term.
However, over the next 5 to 10 years it is widely expected that growth rates from financial markets will be lower than the historical norm. Instead of 8 to 10% annual growth on average over say 10 or 20 years, many economists predict markets like the FTSE 100 and S&P 500 will generate 4 to 6% over the next 10 years. Various factors like long-term low-interest rates and low growth make the outlook look worse.
So what can investors desiring for higher returns do? There's no silver bullet. However sensible strategies do exist that have proven they work over the long term.
For example, investing in a basket of small companies, and/or value (cheap) companies are higher up the risk and return/reward scale.
Over the last 60 years, global small companies have on aggregate delivered 14.7% annualised growth. Similarly, Value companies - which means the market has priced cheaply relative to say for example the assets on the companies books - have delivered a similar return of 14.6% (Source: DFA).
Investors should, therefore, consider investing in more than just large company indexes like Mr Buffett suggests "normal" investors should do.
Those searching for higher returns should look to small and value companies, as well. And if historical averages persist, investors in small and value companies might just beat Mr Buffett over the next 10 years.
Investing in small and value companies is a specialised area and considered higher risk than investing in large companies. With all investing, you could get back less than the initial amount you invest. Advice should be taken before investing and this blog should not be constituted as advice.
Warren Buffett Is Winning A Million-Dollar Bet With This Investing Trick, And You Can Use It Too For anyone still under the impression that the most successful investors rely on complicated, costly strategies, consider Warren Buffett and a $1 million bet he appears on track to win. In 2007, Buffett took the challenge that an S&P 500 index fund would best a carefully chosen investment in hedge funds over 10 years. Smart call. As The Wall Street Journal calculated last week, Buffett’s chosen Vanguard’s S&P 500 fund (Admiral shares) is way, way ahead with just under 10 months to go.