Should you do as Warren Buffett does, or as he says?

Warren Buffett © Getty Images
Buffett’s advice is to go passive

Warren Buffett is widely seen as the greatest investor in the world today. He’s a true investing star.

He’s made billions by finding undervalued companies and then investing heavily in them. He’s never been one to follow the crowd, he’s always made his own calls.

But even though Buffett has made a fortune following his own path, he’s told his trustee to take exactly the opposite approach after his death.

His wife’s legacy will be invested in passive funds – funds that replicate the performance of particular stock market indices such as the S&P 500 in the US. In other words, the trustees will buy what lots of other folk are buying.

So what should you do? Do as Buffett says, or as he does?

Buffett’s advice: put 90% in shares, and 10% in bonds

Let’s start with Buffett’s exact advice. This was revealed in Buffett’s latest letter to shareholders [pdf] in his Berkshire Hathaway investment vehicle. He said:

“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&P 500 index fund. [...]

“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.”

Now, I’m not suggesting that all MoneyWeek readers should follow this advice religiously. But the core principle is sound. Investing in passive funds is a great way to build wealth for the long-term.

That’s because passive funds are cheap, and if stock markets go up, your investments will almost certainly go up too.

Another top investor says the same thing

And Buffett isn’t the only top investor who takes this view.

Terry Smith, manager of the Fundsmith fund, told the FT on Saturday: “My advice to most people is to go passive. They are cheaper and offer better returns over the long run. There are certain managers who are stars, who do make a difference and do beat the market, but they are very, very rare indeed – and they are difficult to find. Forget the stars and go with the market.”

Granted, Smith doesn’t quite have Buffett’s status, but he’s a pretty impressive figure nonetheless. His Fundsmith equity fund has performed extremely well since it was launched in 2010, he’s made a lot of money in business, and 25 years ago he had the chutzpah to expose dodgy accounting practices that were widely used across the City and big business.

So why wouldn’t you follow the advice from Buffett and Smith?

I can think of two good reasons. Either you think there’s a decent chance you can beat the market, or you just enjoy the process of stock picking. Or both.

I invest in individual stocks for both reasons, but I also put some of my portfolio in passive funds. And I’d say there’s absolutely no shame in running a 100% passive portfolio if that’s what you want to do.


Sign up for a 4-week FREE trial of MoneyWeek magazine

MoneyWeek magazine signup

"The only financial publication I could not be without."
John Lang, Director, Tower Hill Associates Ltd.


How to go passive

If you decide you do want to pursue a pure passive approach, you don’t have to follow Buffett’s advice on passive investing to a tee.

For starters, investing as much as 90% of your portfolio in the stock market is normally seen as pretty aggressive. If you think you might need to cash in some of your portfolio over the next decade, you probably should have a lower ‘weighting’ in shares. The same advice applies if you have a particularly risk-averse personality.

What’s more, I think it’s a mistake for British investors to invest so heavily in the US, or the UK for that matter.

That’s because both the UK and US stock markets look pricey at the moment. Not horrendously expensive, but far from the bargain basement. So if you diversify into some cheaper areas such as Japan and emerging markets, you may pick up some value.

And if you’re really worried that shares are too expensive right now, you could drip feed your money into all of the different stock markets over the next two or three years. Then if share prices do fall at some point, you will pick up some shares on the cheap. And if markets never fall from here, you will still have built a solid investment portfolio for  the long-term.

If you’re looking for more advice on how to build a global portfolio of passive investments, Phil Oakley’s Lifetime Wealth newsletter focuses precisely on this issue.

And if that’s too complicated, you could just invest in one stock market fund – the Fidelity World Index fund. This fund tracks the MSCI World index which comprises all the large companies on stock markets around the world. Currently, that means that 49% of the fund is invested in US stocks, 8% in the UK and 8% in Japan.

It’s not a perfect allocation by any means, but it probably wouldn’t be a disastrous investment either. That’s as long as you remember that this fund gives you no exposure to bonds, so any investment must be long-term, preferably at least ten years.

So that’s nice and simple. I’ll leave the last word to Warren Buffett:

“Ignore the chatter, keep your costs minimal, and invest in stocks as you would a farm.”

PS  If you’ve got any queries about the Budget’s pension and Isa changes, the MoneyWeek live Twitter Q&A is just for you. You can pose any Budget-related question to Merryn Somerset Webb or John Stepek this Thursday from 5PM to 6PM. Just follow @MoneyWeek#askmoneyweek

This article is taken from our FREE daily investment email Money Morning.
Receive our thought-provoking investment email every weekday morning plus occasional promotions & become a smarter investor.

Please enter a valid email address

To sign-up enter your email address.




• Stay up to date with MoneyWeek: Follow us on TwitterFacebook and Google+

Our recommended articles for today

Tax the inheritors, not the workers

Those who earn their money shouldn’t have to pay more tax than someone who inherits it, says Merryn Somerset Webb.

Apple will lose the smartphone wars

Apple is fighting to maintain its slot as the globe’s top company. But Google is nipping at its heels, says Bengt Saelensminde. And ultimately, Google will win.

2 Responses

  1. 07/04/2014, Impromptu wrote

    It’s commonly accepted that capital markets deliver on long-term average around 7% total return.
    Say an active fund charges roughly 2%. So that fund will have to consistently do nearly 30% better than the market at large just to earn its keep. And you’re ad valoremed year in, year out, regardless of whether they manage that remarkable outperformance. Would you do a deal on those terms?
    Cautious funds tend to be cheaper on the fees, certainly, but they are really just doing what you could do yourself with a clutch of ETFs and an occasional rebalance. Again, there’s no guarantee, so you pay quite a price for the illusion of relative safety.
    Like the author, I’m in individual securities with the odd themed ETF here and there. The result is rather like the boring, income-spitting bulk of the 100 (and a few international equivalents), but currently sans banks. And, I confess, the odd punt!
    I pay the management fees to myself and sleep soundly at night.

  2. 07/04/2014, Pinkers Post wrote

    Passive investing takes the fun out life! Surely, it’s all about the thrill of riding the rollercoaster!

Commenting on this article closed

MoneyWeek magazine

Latest issue:

Magazine cover
Cheaper oil

Who benefits?

The UK's best-selling financial magazine. Take a FREE trial today.
Claim 4 FREE Issues

Vote in the MoneyWeek Readers' Choice Awards

Vote for your favourite financial services companies in the inaugural MoneyWeek Awards, and you could win a year's subscription to MoneyWeek magazine. Find out more and vote here.


Which investment platform?

When it comes to buying shares and funds, there are several investment platforms and brokers to choose from. They all offer various fee structures to suit individual investing habits.
Find out which one is best for you.