These four words, often referred to as the “KISS Theory,” should be a mantra for many investors who have neither the skills nor time to manage their own investments. I have a very credible ally in this thought process, Warren Buffett, who is advising his own heirs to “Keep it simple…”, to invest their inheritance in index funds (“Warren Buffett to heirs: Put my estate in index funds”)MarketWatch, Ma.rch 13, 2014).
“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.”–Warren Buffet.
Buffett’s rationale: “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…” These sources of noise, encouragement and urgency, include the media and an army of consultants who make money on fear, complication and confusion. In fact, if Buffett had to hang out his shingle today, he might have a difficult time raising and keeping money under the barrage of such scrutiny and short-term focus.
Since Warren Buffett hung out his shingle in 1965, Berkshire Hathaway produced a 20% compounded return, the S & P 500 9.4%. Since less than 20% of money managers routinely beat their benchmarks, you have an 80% chance of hiring one that underperforms the market and paying significant fees for that underperformance. So if you don’t have the “Buffett skill set”, and don’t know an advisor or manager that does, a long-term (very tax efficient) 9.4% doesn’t appear so bad.
Past results offer no guarantee of future performance; but, according to Professor Jeremy Siegel, on the long, long, long-term (1802 to 2006) stocks have offered a compounded real return (adjusted for inflation) of 6.8% (a double on your money about every 10 years) vs. bonds at 3.5% (adjusted for inflation, but not taxes on the income).
My apologies to the 20%!
The points I have made on Mr. Buffett’s advice to his heirs do not give credit the pros that I have met during my career that do provide year-in, year-out superior results. There are other great managers, analysts and advisors out there. In this day and age their jobs become incrementally more difficult in the face of the NOISE, 24/7 media and unrealistic client expectations. Working with these individuals require an effort on the part of the client to understand and accept their disciplines, to be long-term payers and to put on blinders to the nonsense from the street. This requires leaving your emotions and preconceived, media-shaped notions at the door….or you can keep it simple and follow Mr. Buffett’s advice.
What do you think?
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