The Common Investment Mistake That Can Diminish Returns, According to Seth Klarman

Investment Guru Seth Klarman Advises Caution on Investing in Index Funds

Investors Should Stay Invested in The Long-Term with Index Funds

Seth Klarman, founder of The Baupost Group, cautions investors who are putting their money into stock index funds to stay invested for a longer period. According to Klarman, investors shouldn't go into index funds if they are only looking for short-term gains. He further advises that investors who go into index funds should be prepared to stay invested through thick and thin.

Studies have shown that investors can cause significant damage to their portfolios if they try to time the market instead of staying invested for the long term. Bank of America calculations have concluded that since the 1930s, if investors had missed the 10 best market days of each decade, their returns would be reduced from a significant 17,000% to just under 30% for those who stayed invested. Therefore, when investing in index funds, staying invested is crucial to capture the upside when it occurs.

Entry Price is Critical for Long-Term Returns

Klarman also gives caution on index funds, even though he acknowledges them as being a good vehicle for unsophisticated investors with their focus on low costs. According to him, the long-term return for investing depends on the entry price, which means that if an investor enters when the market is expensive, they may be disappointed because they might just match the index, but the index may not perform very well from there.

It is crucial for investors to be patient when investing in index funds since putting all their money in one go could lead to a significant disappointment if they happen to do it at the top of a bull market. Many financial advisors recommend steady buying over time when investing in index funds.

Seth Klarman is The Editor of The Seventh Edition of Security Analysis

Seth Klarman is the editor of the recently released seventh edition of Benjamin Graham and David Dodd's investing classic, "Security Analysis." His extensive experience and insights in value investing have made him one of the most successful investors of his generation. Investors can benefit from his advice on caution when investing in index funds, and the importance of investing for the long term.
In conclusion, Seth Klarman's advice on investing in index funds stresses the importance of patience and a long-term view when it comes to investing. Klarman advises investors to avoid index funds if they are only seeking short-term gains, as the market can be volatile and difficult to time. He also cautions against investing all of your money in one go, recommending instead that investors practice steady buying over time. Finally, Klarman emphasizes that entry price is critical for long-term returns, meaning that investors who enter the market when it is expensive may be disappointed.

For new businesses looking to invest, Klarman's advice can be helpful. Starting a new business can be financially risky, so investing in low-cost vehicles like index funds can be a good way to diversify your portfolio without taking on too much risk. However, it is important to keep in mind Klarman's warning about the need for patience and a long-term view when investing in index funds. Investors should have a well-thought-out investment plan that considers both short-term and long-term goals, and must be prepared to stay invested through market volatility. By following Klarman's advice, new businesses can invest more wisely and increase their chances of long-term financial success.