Money Rehab with Nicole Lapin - Warren Buffett's Favorite Investments

Episode Date: March 27, 2023

If you know Nicole, you know she loves to Index Fund and Chill. As it turns out, so does the investing GOAT Warren Buffett. Here's how to invest like them.

Money rehabbers, you get it. When you're trying to have it all, you end up doing a lot of juggling. You have to balance your work, your friends, and everything in between. So when it comes to your finances, the last thing you need is more juggling. That's where Bank of America steps in. With Bank of America, you can manage your banking, borrowing, and even investing all in one place. Their digital tools bring everything together under one roof, giving you a clear view of your finances whenever you need it. Plus, with Bank of America's wealth of expert guidance available at any time, you can feel confident that your

money is working as hard as you do. So why overcomplicate your money? Keep it simple with Bank of America, your one-stop shop for everything you need today and the goals you're working toward tomorrow. To get started, visit bofa.com slash newprosmedia. That's b-o-f-a dot com slash n-e-w pros p-r-o-s media. bfa.com slash newprosmedia. I'm Nicole Lappin, the only financial expert you don't need a dictionary to understand. It's time for some money rehab. it's time for some money rehab. If you've been listening to Money Rehab for a while, then you know I am all about index funds and chilling, or passive investing, and not basing your investing strategy around picking one all-star stock. And I'm not the only one who advocates for this investing lifestyle. Warren Buffett,

one of the most successful investors of all time, loves this plan too. Actually, in his will, Warren Buffett doesn't recommend that his own family pick stocks or even that they stay invested in his company, Berkshire Hathaway. Rather, he recommends they follow a 90-10 split with 10% of the money in short-term bonds and the rest in low-cost S&P 500 index funds. Now, before we get into it, let's get one thing out of the way, the grammar of it all. I looked it up and the Nasdaq stock market website says that indexes or indices are acceptable, but saying indexes is preferred as the plural of index. If you can't trust the NASDAQ for grammar advice, who can you trust? Okay, fine. I also looked it up in the Chicago Manual of Style, and they use indexes as well. I'm a nerd, I know, so let's go with indexes here. Before we get there, let's talk a little bit about indexes themselves. Now,

the big three indexes are the Dow Jones Industrial Average, the S&P 500, and the Nasdaq Composite Index. The Dow Jones Industrial Average, or just the Dow, tracks 30 major public companies. And when I say major, I am not just talking about market cap. Amazon and Tesla are conspicuously absent from the list. This is because the Dow includes companies that have a strong reputation or track record. They're known as the blue chips, as well as a large market cap. So think Apple, McDonald's, JP Morgan, and Disney. Next up, the S&P 500, which is short for the Standard & Poor's 500 Market Index. At the simplest level, this index tracks the 500 companies with the largest

market capitalization in the American market, but it doesn't rate them all evenly. The largest companies are given more weight than the smaller ones. The other popular market index is the Nasdaq Composite Index. This index tracks the share price of more than 3,700 different companies, including real estate investment trusts. Unlike the S&P, the Nasdaq doesn't limit itself to American companies. It also includes international ones. So you've probably heard a business reporter, maybe even me, at one point say the Dow was down 247 points today. So when reporters say this, what they're actually giving you is a vibe check on the whole market. Same thing with the S&P 500 or the Nasdaq. When reporters are talking about these indexes moving over a period of time, they're using that as a reference for the stock

market as a whole. This is a way more useful metric to put your finger on the pulse of the market than just an individual stock. Take a company like Tesla, for example. Just because Tesla is down doesn't mean the whole stock market is down, right? But if 30 of the biggest companies on the market are down, the whole market is probably down. So let's zoom out. These indexes are what they sound like, funds where you're paying for shares of one of the indexes. So you can think of buying an index fund like buying into the stock market. And that is why I love index funds. And listen, the stock market hasn't always gone up, obviously. But over the

years, the American economy has continued to expand and remain strong. Buying index funds is a bet on a future growth of the economy. That growth will eventually translate to the stock market, resulting in those sweet stock market gains. Now, if you're sold on index funds, here's how to get them. You can't just go to the index fund store and pick one out. You first select a fund, find out its ticker symbol, and then buy it through your brokerage company. Now, of course, you need to make your own good choices. You need to make sure that the fund is managed by a reputable company, that it has low fees, and performed well over time. I can't recommend what funds you should buy into because

I don't know your personal situation, but let's get into it and name some names. We're going to look at SPY and VOO, two funds that Buffett himself invests in. And to mix it up, we're also going to look at a fund that goes by the symbol VFIAX as well, which tracks the same index as SPY and VOO, but functions a little differently. Now, here's the thing about index funds. SPDR S&P 500 ETF, or SPY, and Vanguard S&P 500 ETF, or VOO, they're like the meme of Pam from The Office. They're the same picture.

Or in this case, very similar funds. They both track the S&P 500, so they have almost identical portfolios. Both have no minimum requirements to begin investing in them because they're the same type of fund known as an ETF. ETFs are funds traded as shares on the stock exchange. So you can buy them basically at any time the market is open. And you can even buy a fraction of a share. So there's really no minimum needed to invest. The big difference between these two funds, and it's not even that big, is the fees. SPY has an expense ratio of 0.09% or 9 basis points.

And VOO's expense ratio is 0.03% or 3 basis points, which can, by the way, add up over the years. But still, even nine basis points annually is less than what a lot of actively managed funds charge. Those types of funds have an average expense ratio of 0.47% or 47 basis points. Now, there are also index funds of the mutual fund variety. Instead of buying shares of the fund like you do in an ETF, your money is pulled together to buy shares of companies on the index. VFIAX or Vanguard 500 Index Fund Admiral Class is an example of this kind of fund. Just like VOO, it was created by the Vanguard Investment Management Company. But unlike VOO, VFIAX is a mutual fund. This means you can only

buy in once a day. And as is common with this type of fund, there is a minimum amount required to invest. In this case, $3,000. While the expense ratio on VFIAX is more expensive than VOO, coming in at a whopping 0.04% or four basis points, they're actually cheaper than SPYs at nine basis points. The other thing to watch out for with mutual funds like VFIAX is taxes. With ETFs, you buy a share of the fund. But with mutual funds, investors' money is pulled together in that fund by shares of the company. That means that when the fund sells shares, either because they are relocating assets or because investors have left the fund and they want their money back, you will owe capital gains taxes on your portion of the fund, which by the way, can add to the expense of owning a mutual fund over

an exchange traded fund. When it comes to performance, VFIAX and VOO have both performed equally well since again, they are both tracking the same index. So really, it's a matter of looking at fees, looking at taxes, and the minimum balance to invest to figure out what type of index fund specifically you want to invest in. Once you've selected one, you can buy them using a brokerage account, or if you're using them for retirement, you can buy them through your IRA, traditional, or Roth account. As a quick review, you can open a brokerage account with several different reputable companies like Schwab, Vanguard, Fidelity, E-Trade, Ally. If that seems too overwhelming, you can just dip your toe in the water using an app like Acorns.

Opening an account is similar to opening a bank account. You need money and an ID. These days, most don't require a minimum balance. All right, so open up your brokerage account or your retirement account and get ready to buy your first index fund. Let's say you are into SPY, which by the way is pretty expensive right now, around 400 bucks, but you have $600 in your account, so you are going to buy a share and a half. Inside your brokerage account, click on the trade tab and open up a ticket. You're going to then select that you're trading stocks or ETFs. You pick the account and you enter that symbol. That's the alphabet soup like SPY or VOO. And in this case, we're going to buy with dollars, but you can also buy by number of shares. We're going to buy it at the market rate, and then we are going to place the order.

If you happen to be doing this during the time the market is open, your purchase will be filled momentarily. If you happen to be doing this at night, it will be filled the next day when the market opens. And that is it. Now you own a share and a half of SPY. Isn't that fun? Don't you feel grown up now? Just do it again every time you get paid until it's time to retire and you are well on your way to following Warren Buffett's investment plan for his own family. Seriously, though, that's how you put the index fund in index funds and chill. Just buy the index fund regularly.

And if past performance holds, you will outperform actively managed funds over and over again. For today's tip, you can take straight to the bank. It's not just stocks that are available through passively managed index funds. You can also buy into bond index funds and ETFs, which operate the same way, only they trade in bonds instead of shares of companies. And these can easily be purchased through your brokerage without going through the Treasury website, treasurydirect.com, like when you're buying a bond directly. Bond ETFs can also be easily traded without having to wait for them to mature like you would with a treasury bond. Money Rehab is a production of Money News Network.

I'm your host, Nicole Lappin. Money Rehab's executive producer is Morgan Lavoie. Our researcher is Emily Holmes. Do you need some money rehab? And let's be honest, we all do. So email us your money questions, moneyrehab at moneynewsnetwork.com, to potentially have your questions answered on the show or even have a one-on-one intervention with me. And follow us on Instagram at moneynews and TikTok at moneynewsnetwork for exclusive video content.

And lastly, thank you. No, seriously, thank you. Thank you for listening and for investing in yourself, which is the most important investment you can make.