Legendary investor Warren Buffett endured a marathon appearance on CNBC's Squawk Box on Monday. The good news for those of us who missed it, or didn't have the time to sit through the entire "Ask Warren" show, is that there is an unofficial transcript of all three hours. Over the course of the show, Buffett touched on everything from the price of stocks to what he's set aside for his wife, the Keystone pipeline, bitcoin, the earned income tax credit, and more.
Buffett's appearance came on the heels of the latest Berkshire Hathaway (BRK/A:US) annual shareholder letter, which included some investing advice for his wife and her trustee: "What I advise here is essentially identical to certain instructions I’ve laid out in my will. One bequest provides that cash will be delivered to a trustee for my wife’s benefit. . . . 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 suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors . . ."
CNBC's Becky Quick noted this was the first time she had heard Buffett talk about this.
"You also revealed something in the annual letter this year, where you said, you laid out the terms of your will, what you've set aside for your wife. Which, I didn't know any of this," Quick said.
To which Buffett responded: "Well, I didn't lay out my whole will. . . . I did explain, because I laid out what I thought the average person who is not an expert on stocks should do. And my widow will not be an expert on stocks. And I wanna be sure she gets a decent result. She isn't gonna get a sensational result, you know? And since all my Berkshire shares are going to philanthropy, the question becomes what does she do with the cash that's left to her? Part of it goes outright, part of it goes to a trustee. But I've told the trustee to put 90% of it in an S&P 500 index fund and 10% in short-term governments. And the reason for the 10% in short-term governments is that if there's a terrible period in the market and she's withdrawing 3% or 4% a year you take it out of that instead of selling stocks at the wrong time. She'll do fine with that. And anybody will do fine with that. It's low-cost, it's in a bunch of wonderful businesses, and it takes care of itself."
While Buffett says the advice is intended for "the average person who is not an expert on stocks," my colleague Larry Cao, CFA, cautions that the 3% or 4% withdrawal rule mentioned here may be a “customized” recommendation taking into account both the size of the bequest and Mrs. Buffett’s lifestyle. The 90-10 split is more of the universal rule of thumb. Whether you should withdraw 3%, 4%, or 5% a year may depend on your personal situation.
Retirement security is a topic we think about a lot at CFA Institute, and it's a keystone of our Future of Finance project. What do you think about Buffett's advice? Tell us by leaving a comment in the comment section below.
Related content: "Chasing Warren Buffett’s Alpha”
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22 Comments
Another smart but easy to understand retirement income strategy from the Sage.
Last year he shared the wisdom behind investing in a viable company and simply making systematic annual withdraws at a rate below the company's growth rate.
Either works but, the 10% cash/90% S&P ETF could be explained to a 12 year old.
Very sound and simple advice. Any index fund by its very nature ensures that the investor is continuously rebalancing her portfolio. So businesses that do not perform are excluded and businesses with superior results are included.
Of course, the performance of an index fund would not be spectacular. However, it would deliver an average return higher than any fixed income security and as high as a diversified equity portfolio would.
Majority of Warren's advice makes a lot of sense to me, however in this case a 4%-5% return might not be good enough to support someone who does not have a lot to invest in the first place. The 90-10 rule can only be applicable when the principal to be invested is enormous. As the principal decreases the amount of risk should increase to achieve better results. I would still say that any blue chip stocks would always out perform govt short term bonds on a year to year basis. Hence, although Buffet's advice might hold true for the big guns, for us small time investors blue chips are our investment to rely on.
I think you miss the point.
If you do not have a big amount to invest then it doesn't matter how you invest it, you still will not be able to support yourself on that alone, whether it is Blue Chips or not.
Criticising an opinion by someone like Warren Buffet clearly has to be done with a lot of cautious. I wonder if those who strongly attacked him in these comments appear on Fortune’s rankings. Having say this (nothing personal), what Buffet clearly points out is the fact demonstrated by almost all serious academic research that except for some exceptional and very rare managers, active-managed mutual funds cannot obtain consistent extraordinary results on a risk-adjusted basis and that keeping transaction cost low in an index fund is one of the strategies to follow in the long term.
To contribute to the discussion, it is important to consider for long term investing the expected equity risk premium for stocks in the next decades. As the excellent Research Foundation’s monograph by Hammond, Leibowitz and Siegel “Rethinking the Equity Risk Premium”, it is very probable that we will see much lower excess returns on equity than we used to and that return on fixed-income products will provide better performance than in the recent past. In this respect, investing a larger proportion in high-grade bonds should not be disregard so easily.
A 90/10 allocation between stocks and cash is extremely unsuitable for 99,9% of investors Ms. Buffett's age. She is now 68. I am dumbfounded that someone would call 90/10 a "rule of thumb" and neglect to mention how allocation depends on the plethora of factors (age, cash flow needs and value of assets being in the forefront) that we have been taught in the third part of the CFA curriculum.
Mr. Buffett's advice warrants critical scrutiny: it is an unconventionally risky allocation, requires tremendous discipline to avoid investment behavioral traps, and may not allow for sustainable withdrawals in the worst of markets over decades of retirement. One wonders whether he considered his wife's willingness, capacity, and need to take risk. Likewise, has he worked out an Investment Policy Statement with the Trustee where "a terrible period in the market" is defined? Why not rebalance? After a few years, whether markets rise or fall significantly, the 90% S&P 500 index fund allocation will be even higher. Most retirees are interested in reducing volatility, not increasing it.
If you have read anything about Warren Buffett, you would know that he does not define risk like we have been taught in school, i.e volatility. He also only invests for the long run so having said that, an index fund makes perfect sense with that allocation.
I'm sorry to break this news to you, but not everyone believes or wants the academic version of portfolio allocation. Buffett has done well without it and most likely better than those bashing him here.
Thanks For Sharing..
Mr. Warren Buffett
It's fine advice if you don't mind 50% drawdowns in your portfolio.
*shrug*