Upon his passing, Warren Buffett would like a trustee to place 10% of his wife’s money in short-term government bonds and 90% in a low-cost S&P 500 index fund. Buy-n-holders see this as vindication for the idea that lazy asset management is superior to every other approach. After all, who in the world can claim that he/she knows more about investing successfully than Warren Buffett?
On the other hand, Mr. Buffett’s instructions to a trustee for his wife’s benefit do not tell the whole story. For one thing, Warren understands that the likelihood of his wife’s standard of living being altered in any manner by the buy-n-hold portfolio allocation is negligible. The family is one of the wealthiest on the planet; Buffett’s gift to the Gates foundation notwithstanding, one of the world’s wealthiest billionaires is certainly going to assure that his loved one is provided for. Specifically, even if the S&P 500 were to lose 60% in value in a collapse that mimics 10/2007-3/2009, and even if the market fails to recover after 14 years like the NASDAQ, Mrs. Buffett will not have to change a thing about her standard of living.
Let’s be frank. The uber-wealthy get to play by different rules. Even those who may have modest wealth cannot afford to live with 90% allocated to an S&P 500 index fund. How many retirees with $1,000,000 in the kitty can maintain their standard of living should their account value drop to $500,000 or less, all the while, hoping-n-praying for the kind of Fed-fueled recovery of 2009-2014? That possibility alone shoots down the buy-hold-n-hope approach.
Secondly, the investing landscape is much different than it was in the 1960s, 1970s and 1980s when Buffett’s remarkable well-timed market decisions outperformed major benchmarks. (That’s right. Buffett’s Berkshire Hathaway buys and sells in an attempt to beat the so-called market.) Over the last 20 years — Berkshire Hathaway outperformance has been quite modest. And over the last 5 years — it’s not there at all. It follows that Buffett recognizes his own holding company’s objective of beating the domestic large-cap space may no longer be realistic in today’s world with today’s new technologies and today’s interconnected global marketplace.