Warren Buffett's advice for his wife

bigfreddiel

Warren Buffett said: “My advice to the trustee [for my wife] could not be more simple: Put 10 percent of the cash in short-term government bonds and 90 percent in very low-cost S&P 500 index fund.”

I like the simplicity of this, so, is it true?

I can see many professionals say it's, not as simple as that, but they would wouldn't they, after all they would be out of business.

So is anyone else convinced?

Cheers fj

AlanP_2

If I was a US citizen and had as much to invest as WB's wife then probably yes.

Even if the S&P dropped by 5% a year there would still be enough income being spun off to keep me in a reasonable lifestyle I would have thought until I also passed away.

As a UK citizen with a lot less to play with then - NO.

dunstonh

I like the simplicity of this, so, is it true?

Put it this way, it isnt how he invests. He is a value investor. So, what he does and what he says are two different things.

I can see many professionals say it's, not as simple as that, but they would wouldn't they, after all they would be out of business.

Remember that he is talking the US market were taxation on investments is different to the UK and the US is very inward looking. Most Americans have problems seeing things outside of the US. So, you see most US models are either US heavy or totally US.

Looking back to 2001, US equity has not been performing sector in any of those years. US large cap was 2nd in 2013 and 2014. In 8 of those 14 years, it was above average but in more periods over those years it was mid table.

UK small cap has had 5 of those 14 years as top performing sector. However, reflecting its volatility, it has also been rock bottom in 4 of those years. If I was to make the very poor decision to invest in just one sector for equities, I would take UK small cap over US large cap. However, it would still be a bad decision.

And you have all the other sectors and their varying performances.

Also, 90/10 is a very high risk approach that is far above the typical risk tolerance of the average UK consumer. Most UK consumers do not have the capacity for loss that WB's wife will have either.

PasturesNew

If you've more money than you can spend in your lifetime, good advice doesn't matter. All you really need is somewhere to stick it all..... it doesn't have to perform 1-2% better than something harder to organise/manage, it just has to sit around and be "safe".

bigfreddiel

Well of course I wouldn't use the S&P 500 if investing in the UK! You would use an equivalent, such as the FTSE All Share tracker.

My thinking is it's simple, it's invest and forget, it's cheap to run, so what's not to like?

Someone else said that a 1-2% less return isn't here or there if you have a vast amount to invest. I say cobblers! If you only have a small amount invested then 1 or 2% more isn't exactly going to be a lot is it? And how do you get that 1 or 2% extra return? If you can do that why stop there, go for 5 or 6% extra!

Basically why people fail at investing is because they overthink and over complicate their investments, resulting in excess expense at the cost of very little extra return.

Cheers fj

Thrugelmir

bigfreddiel wrote: »

Warren Buffett said: “My advice to the trustee [for my wife] could not be more simple: Put 10 percent of the cash in short-term government bonds and 90 percent in very low-cost S&P 500 index fund.”

I like the simplicity of this, so, is it true?

I can see many professionals say it's, not as simple as that, but they would wouldn't they, after all they would be out of business.

So is anyone else convinced?

Cheers fj

Given the probable age of his wife. Sounds sensible advice. Think you are reading too much into the quote.

redux

The first and simplest conclusion of what Buffett says is that we might assume he thinks his wife doesn't want to spend as much time attending to investments as he has.

dunstonh

My thinking is it's simple, it's invest and forget, it's cheap to run, so what's not to like?

Use a multi-asset solution then. Not a two single sector funds (where around 10 would be more suitable).

Basically why people fail at investing is because they overthink and over complicate their investments, resulting in excess expense at the cost of very little extra return.

People fail when they do not diversify and have no strategy. i.e. random selections. Such as putting 90% into a single sector.

bigfreddiel

dunstonh wrote: »

Use a multi-asset solution then. Not a two single sector funds (where around 10 would be more suitable).



People fail when they do not diversify and have no strategy. i.e. random selections. Such as putting 90% into a single sector.

Very good advice, but people over complicate things for no good reason other than if it looks complicated it must be clever, there must a reason for it which we as mere uninformed people can't possibly understand. So we go for it at the expense of our investment, and line the pockets of these informed people.


So you can hit a happy medium, four trackers in a mix of equities and bonds will do just as well as anything else.

Cheers fj

masonic

I think it would be reasonable to assume those aren't going to be the only assets in the estate, so in all likelihood there is some more diversification than it appears.

bowlhead99

bigfreddiel wrote: »

Well of course I wouldn't use the S&P 500 if investing in the UK! You would use an equivalent, such as the FTSE All Share tracker.

I think you misunderstand. The investment choice to only look at one sector(US large cap) is flawed, because there are a whole bunch of other sectors out there. But still, to an American dealing with US tax law as applicable to mutual funds (less so to a Brit) a tracker is relatively tax efficient. And US largecap does at least represent over half the world's publicly listed equity capital by value. So a US based investor does not screw up quote so badly as a French or German or Brit investor when he makes the xenophibic decision to invest exclusively in companies listed on his local exchange (go 'murica, yee har!)

However, by contrast, the UK stockmarket is not over 50% of global listed equity capital. It's more like 8% or less. The FTSE 100 and by extension the UK all-share, of which the "100" is over 80%, is an index skewed heavily to certain industry sectors, omits certain other key sectors almost entirely, and has performed worse than the average global equity market for the last couple of decades.

So, if the premise that WB's wife with her huge capacity for loss should just focus on one geographic equity index and one type of debt index is "flawed"... then an averagely wealthy UK investor taking that flawed plan and modifying it to replace its equities with the FTSE all share is, respectfully, dumb as a box of rocks.

My thinking is it's simple, it's invest and forget, it's cheap to run, so what's not to like?

.
The advantage is simplicity. The disadvantage is that it's loaded with flaws.

bigfreddiel wrote: »

Very good advice, but people over complicate things for no good reason other than if it looks complicated it must be clever, there must a reason for it which we as mere uninformed people can't possibly understand. So we go for it at the expense of our investment, and line the pockets of these informed people.

To get decent returns you have to take risk. But just because something is risky it doesn't mean it will deliver decent returns.

Similarly, to avoid the flaws inherent in an overly simplistic plan, you need some thought - which creates complexity. And if you don't have the energy or knowledge to do the complexity yourself, you might need to pay for it. But just because something is complex or required you to pay for it, doesn't mean it's a good solution.

So you can hit a happy medium, four trackers in a mix of equities and bonds will do just as well as anything else.

I would be interested in hearing what four trackers used together in what proportions will give you that optimum balanced portfolio which does as well as anything else.

And, for that matter, what the "just as well as anything else" is judged on. Total return over 40 years? Lowest average volatility? Maximum natural income? Different people have different needs.