The One Fund Solution - The Book I Never Wrote

At one point I was planning to write an investment book I was going to call the One Fund Solution - How to Manage Your Money Without Going Crazy.

The idea was to come up with the simplest way to manage your money so you can spend your time earning more or doing what you want.

It has been well documented that trying to beat the market and day trading are in fact losers games and it is extremely unlikely that a retail investor will beat the market.  Trying to do so will also waste a lot of time which could be spent elsewhere.  At the end of the day, there is really not a books worth of material there, more like an article, which is presented here.

Institutional and retail investors across the globe have been following Warren Buffet’s moves for decades trying to understand not only what stocks he is buying, but why he is buying them.  For most investors no matter how much Buffet is studied, his results will never be duplicated.  However, in 2014 buried in his annual letter to Berkshire Hathaway investors was a short paragraph which holds some incredible advice investors can use to simplify their investing which also gives them a great chance to beat the professionals. This dealt with the directions Warren has given in his will as to how the money he leaves for his wife should be invested.  Surprisingly to some it did not involve investing in the stock of Berkshire Hathaway.

Warren said;

“My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% 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.”

Since its 2014 publication, the advice has been much debated and I believe the most important part of it has been ignored.  Many launched into a debate of the wisdom of a 90% allocation to equities for what will be an elderly beneficiary.  Others eschewed the lack of international diversification in the portfolio. While common sense suggests no matter the allocation the beneficiary here will be well off, there are some interesting points an investor can study.

When analyzing the instructions, it is clear that Buffet favors equities over fixed income and this is of course no surprise.  He has written extensively on his preference for stocks over bonds.  Additionally, he has a clear preference for the US stock market as he picks the Standard and Poor’s 500, the index of 500 stocks providing an investor with exposure to all facets of the United State’s economy.  Given the global reach of these firms, likely Buffet believes it also provides indirect exposure to international markets.  He also understands that over time this index changes due to companies, growing, failing, being taken private and replaced. This updating mechanism while not considered stock picking, allows for the index to change with the times and continue to represent the “bet” on America Buffet wants the trustee to make.  By selecting an index fund, it is clear that Buffet also believes that most stock pickers rarely beat the market for long periods of time.  Given this, a low-cost index fund is the best way to capture the benefits of being invested in the US economy without incurring high costs.

So, what is the key takeaway for average investors?  In my opinion, it is simplicity.  The idea that a successful portfolio does not need to be complicated to be quite profitable.  In fact, while many Bogle heads embrace a simple three fund portfolio, this one can be an even simpler one fund portfolio.                 The asset allocation can be picked and changed to suit one’s risk tolerance and simply be one ETF of the S&P 500 index at an allocation of choice with cash, CDs and Treasuries of a term that suits the goals of the investor filling out the balance of the allocation.  In essence taking no risk on the fixed income side.

This simple one fund portfolio may not be the best, but it will likely allow one to sleep at night, outperform the gurus and be simply managed without sacrificing lots of time.  For that lesson, we should thank Warren.

 

   

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