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 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.
Speaking of today’s new technologies and today’s interconnected global marketplace, each is yet another reason why 10% in short-term Treasuries and 90% in an S&P 500 index fund will not make sense for most people. Whereas fundamental value may have been the primary driver of stock movement in the 20th century, technology has increased the participation by those who merely invest via price movement. Half of all participation is high-frequency trading; another large percentage of institutional , myself included, regard trendlines and relative strength indices. Modern-day technologies have the ability to push ETFs like iShares S&P 500 (IVV) and Vanguard S&P 500 (VOO) down much further than theoretical buy-n-holders can even imagine.
On another point, since when did diversification become a dirty word? U.S. stocks represents roughly 1/2 the world’s market capitalization, and large-cap U.S. stocks even less. Holding large-cap U.S. stocks alone is likely to severely underperform a basket of global equities over long stretches. How patient might you be with the S&P 500 in a decade like 2000-2009? Let’s say you put $500,000 in the S&P 500 SPDR Trust (SPY) with reinvested dividends, expecting to retire with $1,000,000 on 7% per year. If you did not touch it, you only had $452,000. In contrast, a diversfied basket of global stocks and bonds via Blackrock Global Allocation might have taken that same $500,000 to $1,000,000 with a total return north of 125% in the decade. Diversifying with REITs, MLPs, preferreds as well as emerging market equities was another way to outhustle the S&P 500.
Finally, I have not come across any investors who genuinely wish to plow 90% or more of net worth into SPY, IVV, VOO or Vanguard S&P 500 (VFINX). Simply stated, most high net worth (as well as modest net worth) clients whom I have met have different objectives. Some have expressed a desire to preserve capital; others explain that they wish to take very little risk; still others are very specific about never losing more than 8% on a single investment or the portfolio at large in a 12-month span.
It follows that a strong steward of other people’s money or his/her own account will execute an unemotional discipline to deal with the reality of the emotional, in-the-moment world that we live in. Buy-n-hold 10% short-term treasuries and 90% in a low-cost S&P 500 index fund? Only if you’re Mrs. Buffett. The rest of us need to get intimate with portfolio protection strategies — stop limit-orders, trend-following, RSI, put options, hedging, non-correlated assets (i.e., diversification) — to secure a desired standard of living.