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Warren Buffett On Passive Index Investing
Warren Buffett’s latest shareholder letter provided an insight into his personal advice to the trustee of his will in relation to the bequest to his wife:
‘Put 10% of the cash in short-term government bonds and 90% in a very low cost S&P 500 Index Fund. 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.’
It’s interesting to see the Oracle recommending his wife’s bequest for the 90% share asset allocation be entirely invested in an Index Fund.
Here is one of, if not the best active investment manager in the world giving a ringing endorsement to the merits ofpassive index investing.
The following chart of the percentage of US Equity (share) funds which outperformed their relative Index (courtesy of Business Insider) shows you clearly why Buffett would have formed this view.
A quick look in the five year column shows something like 70% to 80% of managers FAILED to outperform their relative index. These are appalling statistics for what is termed the MANAGED fund industry.
The majority of investors are paying fees for sub-standard results. Which is why Buffett said:
‘…long-term results from this policy will be superior to those attained by most investors…’
Buffett also went on to state (emphasis mine): ‘Nevertheless, both individuals and institutions will constantly be urged to be active by those who profit from giving advice or effecting transactions. The resulting frictional costs can be huge and, for investors in aggregate, devoid of benefit.’
With this comment Buffett takes a swipe at Wall Street and the investment industry in general. Clipping the ticket on transactions is the name of the game — irrespective of whether those transactions succeed or fail.
Read the rest of this article at The Daily Reckoning
