I’m a big fan of index funds because, quite frankly, I don’t know much about investing and I would rather spend my time doing other things than learning how to invest in individual companies. Warren Buffett agrees with me on this as his response to a question at the Berkshire Hathaway annual shareholder meeting:
“If you were 30 years old and had no dependents but a full-time job that precluded full-time investing, how would you invest your first million dollars, assuming that you can cover 18 months of expenses with other savings? Thank you in advance for being as specific as possible with asset classes and allocation percentage.”
Buffett let out a small laugh and began. “I’d put it all in a low-cost index fund that tracks the S&P 500 and get back to work…”
That is exactly what I do with most of my investments – I place them in low cost index funds and go about my other business without having to worry about them. It’s simple, it works and it gets a good long term rate with little effort. That’s pretty hard to beat.
Then there is another little part of me that wants to pick individual stocks and make that investment “killing” that everyone reads about in the financial pages. Here, I rely on the advice of Peter Lynch who puts forward the advice “invest in what you know.”
I don’t know a lot of things, but I do know when I see gadgets that I want. I really wanted to get the new Apple 3G iPhone, but I know if I can wait a few months, I will avoid the “early adopter premium” and can get it for a discounted price when all the hype and newness has worn off. It will also give them a chance to work out any bugs that might be there.
What did I do instead? I took the $199 and bought some Apple (AAPL) stock. This little investing hack has worked wonders for me. I consider myself pretty average, so if I’m excited about something, there is a good chance that there are a lot of other people that are also excited about it. I take this as my cue of “invest in what you know” and instead of buying the gadget that I want, I but stock in the company for the amount the gadget would have cost.
So when the iPod came out which I really wanted, I took the $399 price and placed it into Apple stock in October 2001. Even with the terrible stock market we are currently having, that $399 is now worth over $7000 today, a gain of 1700%+ over that time. When the original iPhone was released in June 2007, I wanted it, but instead placed $599 into apple stock. It’s now worth about $840 today, a 40% gain over that time. So when the Apple 3G iPhone went on sale last week, I took my $199 and bought some Apple stock again (even better, I avoided waiting in those horrendous lines).
I do this with all the gadgets that I want (not just Apple) and while some don’t work out as well as I hoped, overall I am way ahead of the S&P 500 using this method. It’s an easy hack and if you trust your instincts on the latest gadgets, it can make you a pretty penny in the process.
Image courtesy of waltarrrrr