Invest in an Index Fund, Says Buffett

Warren Buffet, Peter Lynch, Charles Schwab, The Motley Fool, Knight Kiplinger and Jim Cramer are just some of the people who believe that index funds are a good investment, according to a FundAdvice.com article by Paul Merriman posted last week.

What is an index fund, you ask? It's a type of mutual fund, as Mr. Merriman explains:

An index fund attempts to replicate the investment results of a target index or an asset class by investing in all the securities in that index or in a portfolio that closely approximates the index. That gives investors the overall return of that particular index or asset class. And while “average” might not be your goal in most areas of life, actually achieving average market returns could make you an above-average investor.

Merriman goes on to state that index funds are cheaper, tax-efficient, and less risky. Furthermore, academic research indicates investors in individual stocks do not have as high of returns as the market average. With index funds, you get the "market average." While you may not see extremely high returns during a market upswing, your losses may not be as severe during a recession.

I found this article to be particularly intriguing to me personally because I was in the same room as Mr. Buffett in the fall of 2005, and he gave the same advice about index funds. He was visiting Medical Protective, which had just been acquired by Berkshire Hathaway, and I had just started my internship with the company.