Some of the greatest investors in the world like Berkshire Hathaway duo Warren Buffett and Berkshire Hathaway are fully aware of the fact that it’s getting harder to outperform the index these days. An index is hard to beat for many reasons. Firstly, most studies show that on average the people who do best don’t do anything to their portfolios – buying and selling just doesn’t usually help. Second, disruption is happening so much quicker in the world that it’s easier to benefit from global growth by owning lots of shares at once. Third, various psychology biases can cause us…
Some of the greatest investors in the world like Berkshire Hathaway duo Warren Buffett and Berkshire Hathaway are fully aware of the fact that it’s getting harder to outperform the index these days.
An index is hard to beat for many reasons.
Firstly, most studies show that on average the people who do best don’t do anything to their portfolios – buying and selling just doesn’t usually help. Second, disruption is happening so much quicker in the world that it’s easier to benefit from global growth by owning lots of shares at once. Third, various psychology biases can cause us to make the wrong decisions.
Warren Buffett’s children have said that Charlie Munger is the smartest person they know. So, with that in mind, here are two exchange-traded funds (ETFs) I would imagine Mr Munger might say are decent long-term ideas:
iShares S&P 500 ETF (ASX: IVV)
The S&P 500 might be the best index to invest in.
It is very diverse with 500 constituents spread across various industries. Most of the underlying earnings are earned from around the world – these are global businesses we’re talking about. As some businesses fade, the newer and exciting ones replace them – such as Facebook.
The S&P 500’s largest holdings include Microsoft, Apple, Amazon, Facebook, Alphabet and Berkshire Hathaway.
Most ETFs seeking to give investors exposure to the S&P 500 have very low management fee costs. Blackrock is the provider of the iShares S&P 500 ETF and its annual fee is an extremely-low 0.04%.
Both Mr Munger and Mr Buffett have long suggested that most people will do very well by just investing in the S&P 500.
Vanguard FTSE Asia Ex Japan Shares Index ETF (ASX: VAE)
Mr Munger has come out with plenty of memorable quotes over the years.
One of his best is “fish where the fish are.” He recently said this about the Chinese share market (in this linked video) at the Daily Journal Annual Meeting. He was essentially saying that the Chinese market offers the most opportunities.
Of course, there are plenty of things to dislike about the idea of investing in China. Governance risks, independence from the government and so on.
But, there are plenty of reasons to like investing there too. Much lower valuations, huge long term economic growth, incredible technological innovation and a vast population.
Investing in individual Chinese shares could be even riskier than picking US shares or ASX shares, so this Vanguard Asian ETF could be the best way to broadly invest into the growing economic region.
Don’t forget, as India grows in economic power this index should shift to reflect that as well.
If you hold with many years in mind, decades preferably, then you can’t go wrong with the S&P 500. But, I am particularly drawn to the Vanguard Asian ETF due to its low valuation and pleasing underlying earnings growth – I am looking to increase my allocation to this ETF quite a bit this year.
The main problem with the above two ETFs is that they have quite low dividend yields and they don’t offer franking credits. That’s why these quality ASX dividend stocks would work well in a portfolio together with the above two ETFs.
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Motley Fool contributor Tristan Harrison owns shares of VANGUARD FTSE ASIA EX JAPAN SHARES INDEX ETF. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.