|Warren Buffett has made his fortune by investing; his net worth stands at $53.5 billion, as estimated by Forbes, gained through a lifetime spent learning about investing and applying his knowledge to earn lucrative gains.
Buffett recently revealed in a letter to shareholders of his holding company, Berkshire Hathaway, a formula for investing that is easy enough for anyone to follow.
Warren Buffet’s 90-10 Investment Strategy
In his letter to Berkshire Hathaway shareholders, Buffett said that many investors feel they need to have knowledge “about specific businesses to predict their future earning power.” But that isn’t needed, Buffett said, providing some straightforward strategies for investing that are simple enough for a beginner to follow.
“Following those rules, the ‘know-nothing’ investor who both diversifies and keeps his costs minimal is virtually certain to get satisfactory results,” Buffett said.
“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.”
1. Trust the American economy.
“In aggregate, American business has done wonderfully over time and will continue to do so (though, most assuredly, in unpredictable fits and starts),” Buffett said.
2. Diversify investments.
“The goal of the non-professional should not be to pick winners — neither he nor his ‘helpers’ can do that – but should rather be to own a cross-section of businesses that in aggregate are bound to do well. A low-cost S&P 500 index fund will achieve this goal,” Buffett said.
3. Keep a steady course.
Professionals and amateur traders can both lose out by paying too much attention to the ups and downs of the market, Buffett said. The best way to avoid this downfall is “to accumulate shares over a long period and never to sell when the news is bad and stocks are well off their highs.”
Buffett said this strategy would beat anything set up by expensive fund managers. “I believe the … long-term results from this policy will be superior to those attained by most investors — whether pension funds, institutions or individuals — who employ high-fee managers.”