Warren Buffett’s Advice


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I am sure you have heard of Warren Buffett, who is generally considered to be the most successful living investor. He is CEO, chairman and president of the US listed investment company Berkshire Hathaway; which as of last night had a share price of US$187,750. Due to Buffett’s phenomenal investing success, (over the last 49 years he has returned 19.8% per annum compared with 9.8% from the S&P500) he has a cult-like following and his annual ‘letter to shareholders’ are eagerly looked forward to from both investors and investment professionals around the world. 

In the 2013 letter to shareholders (released 28 February 2014) Buffett details the financial instructions which he has put in his will:

“My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P500 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.”

Buffett has made his money from buying and selling shares, hence it is somewhat of an anomaly that the world’s greatest active investor is in support of a passive investment strategy (index funds). I have long been a fan of index funds and nearly all of my clients have exposure to them. I have previously written an article explaining index funds, and even included some old Buffett quotes in support of them. However to now hear that he has instructed the executor of his estate to invest 90% of the assets in index funds is profound.

I humbly suggest that Buffett’s choice to have all of the funds in the US is wrong, especially as the Credit Suisse Global Investment Returns Yearbook 2014 states that the real return (after deducting inflation) of US equities between 1900 and 2013 is 6.45% compared with Australia’s 7.37%. In addition, whilst we live in an increasingly interconnected world, there is still country specific risk and hence benefit from global diversification. That said, Buffett’s strong support for index funds should not be ignored – except perhaps by all the active fund managers out there.

Is it time for you to review your investment portfolio and superannuation investments? If so please contact Avant Financial Services for a complimentary review.

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