Jul 20, 2016
Pattie Lovett-Reid: Warren Buffett wants you to keep your investment strategy simple
Warren Buffett has always been very clear that he would like his estate to go into low-cost index funds. Although, he has been an active fund manager his whole life. Translation: do as I say, but not as I do.
In a letter to shareholders back in 2014 he wrote:
My advice to the trustee couldn't be more simple: Put 10 per cent of the cash in short-term government bonds and 90 per cent 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.
In other words, if we adopted a cheap and easy investment strategy, we all might be further ahead financially. Here are a few tips that have been passed down to me over the years from very savvy fund managers who oversee billions of dollars.
1) Don't believe in your own predictive power. Everyone can get lucky in the market once in a while. But never confuse skill and luck.
2) Stop trying to time the market. Hyperactivity can lead to high transaction costs, resulting in lower rates of return. There will always be some sort of wall of worry for investors — Brexit, geopolitical risk, company risk, economic risk, currency risk – the list goes on. However, one of the biggest risks is often overlooked: your reaction to the perceived risk at hand. Frequent movement in and out of the market means you have to get it right twice, both going and coming out. This is tough for even the experts to do. Doing nothing is often the right response even when you want to do something.
3) Consistency matters. If you look for a fund manager and pick the top quartile performers, the odds are that position isn't sustainable nor are your returns. I would much rather pick a fund that has consistently performed in the top two quartiles over time. Wild swings can be brutal on portfolio. Slow and steady wins the race.
4) Don't shift your risk profile significantly lower the closer you get to retirement. This line of thinking was based on the 30-year bull market in bonds we've been through. That was then and this is now. Rates are ridiculously low and likely will be for some time. Having a portfolio focused only on fixed income is going to give you little if any capital appreciation. Sure, as confidence comes back to the market, bonds will come back into vogue with the focus shifting from government bonds to corporate bonds. But it is going to take time.
5) Try to sustain your lifestyle in retirement. You can do this by living off the dividends of good quality investments in your portfolio, coupled with the government pensions and possibly your company pension plan. That way you don't have to live in fear of fluctuations in the markets and being forced to sell at exactly the wrong time.
Whether you decide to take a passive or active approach to your investment, acknowledge and accept there will be fluctuations but the key strategy seems to be, time in the market with good quality investments is what leads to wealth creation.
