Warren Buffet infamously has just two rules for successful investing. Rule #1, as it is called, is simply to ‘Never Lose Money’ and Rule #2, as it is called, is…’To Never Forget Rule #1.” That’s it – that is the sum of Warren Buffet’s advice, well his rules anyway. But in February of 2017, he was interviewed by Fox Business where he explained that passive investing through the use of index funds will outperform active investing, almost every time.
To his credit, there have been studies published in both the New York Times and the Washington Post which have compared the results of the S&P500, excluding dividends since the index produces no dividends, has outperformed all active fund managers. Yes, not even 1% of active managers have outperformed the index (an individual here or there does not a full percent make). With these results, Warren boldly claimed the index is all you need.
While that is mostly true, Warren has broken his own rule… specifically Rule #1 to Never Lose Money. This is because when the market corrects, which we know will come, the index does go down and you can and will lose money when invested in an index that has corrected. The PEAK-TO-TROUGH total loss percentage of the S&P500 during the Great Recession was 57%. So, we cannot follow Warren Buffet’s Rule #1 while investing directly into the index.
There are, however, ways that we can capture the index growth WITHOUT the risk of loss and this strategy is very much a part of the planning we do. So, it is possible to completely follow Warren’s advice after all – GET IN THE KNOW…
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