Warren Buffett, the king of stock pickers, flatly endorses a simple portfolio
of inexpensive index funds for his own family.
Don’t pick stocks like me, he says. Put your money in index funds instead and you’ll do better.
On page 20 of a recent annual letter
to Berkshire Hathaway shareholders, Buffett says that after all of his Berkshire shares are distributed to charity he expects his executor to take any leftover cash and just buy index funds:
"My advice to the trustee couldn't be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard's.) I believe the trust's long-term results from this policy will be superior to those attained by most investors — whether pension funds, institutions or individuals — who employ high-fee managers."
What's fascinating about this letter isn't that he favors passive investments. That much we already knew. Nor that he believes in stocks, as a 90/10 split clearly implies.
What's fascinating is that he doesn't want his executor to keep the money in Berkshire, where presumably his influence would continue on for at least a few years. Nor does he want his surviving family to bother with Wall Street and active money managers.
Again, from the letter:
"Both individuals and institutions will constantly be urged to be active by those who profit from giving advice or effecting transactions. The resulting frictional costs can be huge and, for investors in aggregate, devoid of benefit. So ignore the chatter, keep your costs minimal, and invest in stocks as you would in a farm."
Some will argue that Buffett's advice is a case of "do as I say and not as I do," and that's a fair criticism. For instance, on Berkshire's behalf he holds a small number of stocks in a limited number of sectors. One academic analysis
of his Berkshire investments found a median holding period of one year.
But listen carefully to what Buffett is saying in his letter. Frictional costs are huge and, for investors in aggregate, devoid of benefit. He really is saying "do as I say, not as I do" — because you and I aren't Warren Buffett.
The researchers put it this way:
Warren Buffett's record by the start of our sample period strongly suggests he is a gifted trader. His success in subsequent years in generating abnormal returns doesn't in itself imply market inefficiency. Rather such returns can be construed as compensation for his extraordinary talent and acquisition of private information.
Do you have access to the same private information as Warren Buffett? Do you have his level of investing skill? Does your financial adviser?
If the answer to these questions is "no," just buy a portfolio of index funds
. You'll do better than most, avoid losing money pointlessly to high-cost active managers and certainly do well enough over time to retire with more.
It's what Buffett is doing for his own family.
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