Retirement & Financial Planning Report

Everyone "knows" that affluent investors have an edge because they can invest in hedge funds, run by smart people with powerful computers. One pretty knowledgeable investor disagrees, though. Warren Buffett is so convinced that hedge fund fees cripple returns that he bet $1 million that the plain vanilla S&P 500 Index would beat elite hedge funds over a 10-year period. (The money wagered will go to charity.)

The wager period started at the worst possible time for Buffett: early 2008, right before stocks crashed and the S&P 500 plunged. By now, nearly half-way through the 10 years, the S&P is showing a modest gain (around 2%) while the hedge funds selected for the bet are down a reported 4.5%.

The end result is uncertain but the lesson is already clear. Average investors aren’t losing by being shut out of hedge funds. Even the smartest professionals have a hard time beating the broad market, long term, especially when their fees are steep. Basic strategies (invest regularly, diversify your holdings) are likely to pay off for patient investors.