Warren Buffett wants you to be lazy.
We’re not talking about lying on the couch, eating chicken wings, and watching infomercials lazy. We’re talking lazy in your entire investment philosophy.
Allow me to explain…
In 2008, Buffett made a bet that sheer laziness would beat a slog-it-out, dogged, high frequency investing style. Buffett bet Protégé Partners — an asset management firm — that a Vanguard S&P 500 index fund would have better returns than a group of five hedge funds. This wasn’t just lip-service; Buffett put a cool million where his mouth is.
So, how’d he do?
Well, right now, Buffett’s little index fund is up over 40% while Protégé’s five funds gained an estimated 12.5%.
And that doesn’t include the immense fees associated with a big time money manager. You can just buy the fund on your own in a matter of minutes.
How in the world can a lazy, set-it-and-forget-it portfolio beat out the hedge fund heavyweights? The answer is brilliant in its simplicity…
Truth be told, most Americans could never afford to have a hedge fund to take care of their investments. Based on the above returns, count yourself lucky. Even with such subpar results, hedge funds typically charge a “two and twenty fee”. In layman’s terms, that means they take 2% of your assets AND 20% of your gains.
I don’t know about you, but that seems like a boatload of money to me…
But before thanking your lucky stars that you don’t pay that kind of money in fees, let’s take a look at the most famous of investing strategies: the 401(k).
A recent survey found that 92.6% of American adults have no idea at all what hidden 401(k) fees are costing them… and what’s worse, 70% didn’t think they paid any fees at all!
You are paying fees, to be sure, which should come as no surprise. You obviously have to pay something for such a service.
It’s how much you are paying that is shocking. Over a lifetime, these fund fees cost an average American household $154,794! If you are a higher income earner, you could be bleeding up to $277,969.
That’s almost one-third of your hard-earned savings.
Overall, 401(k) fees eat up $25 billion of Americans’ savings each and every year.
That’s a whole lot of loot to hand over for that “peace of mind” that seems to be all the rage these days. Managing your own portfolio can save you all that money — and more — all while resting easy. You see, investing yourself is not rocket science…
You just need to know a bit about asset allocation. The graph below lays it out pretty well:
In order to replicate most 401(k) plans, we’re going to look at ETFs that are based on large benchmark indices. But before you write this off as a lazy, simple-minded investing strategy, remember Warren’s bet. He even reiterated it in his shareholder’s letter from this year. When asked how his trustees should manage his funds after he passes on, he advocated essentially the same thing we are: low-cost index funds.
“My advice to the trustee couldn’t be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P500 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.”
So, with Warren’s backing, here are a couple of quick funds to get you started on your own…
We’re sticking with Vanguard for the sake of example, but there are plenty of options when it comes to index ETFs.
Vanguard S&P 500 (NYSE: VOO)
Warren’s choice is up 69.3% over the last five years. Here’s the rundown:
- Invests in stocks in the S&P 500 Index, representing 500 of the largest U.S. companies.
Goal is to closely track the index’s return, which is considered a gauge of overall U.S. stock returns.
Offers high potential for investment growth; share value rises and falls more sharply than that of funds holding bonds. - More appropriate for long-term goals where your money’s growth is essential.
- The expense ratio is 0.05%. This is 95% lower than the average expense ratio of funds with similar holdings. And infinitesimally small compared to what money managers would charge you for doing the exact same thing.
Vanguard Total Bond Market Index Fund (NYSE: BND)
BND is a safe bond index that has returned 6% over the past five years in an abysmal bond market. Plus, its expense ratio of .20% is a full 78% lower than the average expense ratio of funds with similar holdings.
Here’s the breakdown:
- This fund is designed to provide broad exposure to U.S. investment grade bonds.
- The fund employs an indexing investment approach designed to track the performance of the Barclays U.S. Aggregate Float Adjusted Index. This Index represents a wide spectrum of public, investment-grade, taxable, fixed income securities in the United States-including government, corporate, and international dollar-denominated bonds, as well as mortgage-backed and asset-backed securities-all with maturities of more than 1 year.
- Because the fund invests in all segments and maturities of the fixed income market, investors may consider the fund their core bond holding.
Vanguard Small Cap Value ETF (NYSE: VBR)
No portfolio is complete without some degree of risk. How else are you going to pull in serious gains?
The small cap index is a great way to get exposure to a volatile market while still spreading your risk out. Over the last five years, this “volatile” small-cap ETF has returned a whopping 123.8%.
Here’s the breakdown:
- The investment seeks to track the performance of a benchmark index that measures the investment return of small-capitalization value stocks.
- The fund employs an indexing investment approach designed to track the performance of the Center for Research in Security Prices US Small Cap Value Index, a broadly diversified index of value stocks of small U.S. companies. It attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the index, holding each stock in approximately the same proportion as its weighting in the index.
So right there, you have a solid base of DIY portfolio positions, outside the grasp of money manger fees…
With that basic knowledge, you can free yourself from a lifetime of fees. You’ll also be able to free up the time and cash to take a few swings at some serious money makers…you know, the fun stuff.
Like establishing a position in a booming biotech play that could deliver the biggest gains of your investing lifetime…
Like using “daily dividends” to boost your yields ten-fold…
Like buying yourself a piece of a gold miner that will soar when gold rebounds to new highs…
Or setting up an IRM(72) account for compounding interest…
So, screw the hedge funds and money managers. Not only can you handily beat the so-called experts, but you can have the satisfaction of doing it yourself. You’ve seen the results of Warren’s lazy hedge fund bet. So go ahead, bet on yourself…
Because when you bet on yourself, you set yourself up to win big.
