Many regular folks read inspirational stories of investors earning their way to an early retirement and get the urge to try such a thing themselves. Who can blame them?
There’s just one problem. The average person has no idea how to invest. The stock market is a dangerous place for somebody with no experience.
Warren Buffett, who is the most famous investor of all-time, knows this feeling better than anyone. He receives thousands of letters each year begging for stock tips and portfolio management advice.
Buffett used to give everyone similar advice. He would tell people to put their money to work in Berkshire Hathaway, his holding company.
These days, Buffett is singing a different tune. Instead of telling rookie investors to invest with him, he recommends a very simple portfolio using just two exchange traded funds (ETFs).
Buffett’s choice for the majority of a portfolio is a S&P 500 exchange traded fund, which tracks the 500 largest companies in the United States. It’s an incredibly simple (and cheap!) way for investors to buy a broad investment in the world’s top companies.
The rest of the portfolio would be invested in a government bond ETF. It would serve as a hedge, smoothing out returns if the stock market went down.
It may seem odd the world’s best stock picker is recommending investors take a passive approach, but Buffett recognizes the average person has no chance of picking winning stocks. Developing an edge is so difficult many argue even experienced stock pickers would be better off buying passive investments and putting their brainpower to work somewhere else.
