Billionaire Warren Buffett believes most of us should just invest in an index like the S&P 500 and get on with our lives. The reason is that outperforming an index over time is very difficult.
I’m not a professional fund manager, but I think there’s a way for investors like me to have a meaningful shot at doing better than the wider stock market in terms of total returns.
Investment fees
There are a few reasons Buffett thinks that even professional investors struggle to outperform an index like the S&P 500. And a big reason is that the fees they charge. Hedge funds often charge a management fee of around 2% before any performance-related bonuses. So they have to overcome this before generating any returns at all.
That’s a big disadvantage and a key reason that many professional investors find it hard to generate consistent outperformance. But investors like me can flip the odds in our favour.
Instead of incurring fees, a Lifetime ISA (LISA) can give UK residents a head start on the stock market. And that makes the chances of getting a better return much higher.
Lifetime ISAs
Those who are eligible can deposit up to £4,000 a year in a Lifetime ISA and receive a 25% bonus from the government. So even before investing, the account goes up to £5,000.
For someone who invests the full £20,000 ISA contribution limit in a combination of a LISA and a Stocks and Shares ISA, the overall boost is 5%. But this is still a big advantage.
Having a head start doesn’t prevent underperformance, you can buy stocks that go down while the index goes up. But I think it does tilt the odds in favour of investors.
LISAs come with specific withdrawal conditions that need careful consideration. But for investors like me, it’s the biggest edge I can think of in aiming for above-average returns.
My largest investment
Unusually, I only own one stock in my LISA. It’s Berkshire Hathaway (NYSE:BRK.B) and I’m planning on adding to my investment in April when the new tax year arrives.
According to the company’s filings, one of the biggest risks it faces is the possibility of a huge insurance loss. And that’s something investors need to keep in mind. Berkshire can’t eliminate this risk, but the company’s mindful of the danger and has vast cash reserves available to deal with pretty much any situation that might arise.
I also think the firm’s growth potential is better than a lot of investors realise. Specifically, I see increasing energy demand in the US as a result of artificial intelligence as an opportunity.
Portfolio building
As stated, Berkshire Hathaway’s the only investment in my Lifetime ISA, but with the stocks I own elsewhere – such as in my Stocks and Shares ISA – I have a much more diversified portfolio. One reason for keeping my Berkshire investment in my LISA is that the firm doesn’t pay a dividend. Since I can’t withdraw gains until I’m 60, passive income makes no difference.
Whether I’m going to outperform the S&P 500 overall remains to be seen. But in terms of my overall portfolio, I think a 5% head start gives me a pretty decent chance.
