Several years ago, a 30-year-old man stepped to the microphone during question period at Berkshire Hathaway’s annual shareholder meeting. In a voice that poorly masked his nervousness at speaking in front of 40,000 people, he asked Warren Buffett and Charlie Munger a question.
Watch the video
“If you were 30 again, and your first million in the bank, how would you invest it? he asked the two billionaires. Assuming you are not a professional investor, have a full-time job, have an emergency fund to cover your expenses for 18 months, don’t have children… Can be as specific as possible about how to invest it? »
Warren Buffett replied: “Based on the conditions you state, I would invest in an index fund [d’actions américaines] low management fees offered by a reliable company, possibly Vanguard […]. A fund that will give you a perfectly decent return over a period of 30 or 40 years. And then I would forget about it, and I would go back to work. »
This exchange took place on Saturday, May 3, 2008. If we had implemented it as soon as the markets opened the following Monday by purchasing an index fund that tracks the largest stock index in the United States, the S&P 500, what would be the yield?
After almost 16 years, our million would today be worth $5,200,000, for an annualized compound return of 10.85%.
Some observations.
1) That was good advice.
2) In the short term, this must have seemed like very bad advice. Between May 2008 and February 2009, this investment lost 46% of its value. After just nine months, the million was worth just $544,000. The majority of people would undoubtedly have concluded that it was a failure and sold in panic.
3) The man, Tim Ferris, followed Buffett’s advice, but not 100%. He put the majority of his million in an index fund, but kept some to invest in various forming companies.
4) It must be nice to have 1 million to invest at 30 years old. For the record, Tim Ferris founded a nutritional supplement company at the age of 24. He is also the author of the mega-sales bookstore success The 4 hour week.
I was thinking about this advice recently as Berkshire Hathaway’s annual meeting is coming up in a few days, over the weekend of May 4, in Omaha, Nebraska.
And I asked myself the question: today, does Warren Buffett’s advice still hold?
Buffett didn’t put it in these terms, but he wrote in his most recent annual letter:
I do not remember a period, since March 11, 1942 – the date of my first stock purchase – when I did not have the majority of my assets in American stocks […]. America has been a great country for investors. All they had to do was sit quietly and not listen [aucun prévisionniste économique].
Warren Buffett
Warren Buffett’s advice was given to an American. How can we adapt it for a 30-year-old Canadian who would have 1 million (or $10,000, $50,000, or $100,000, the amount doesn’t matter) to invest?
Here’s how I would invest 1 million long term today if I was 30 years old. For the purposes of this exercise, let’s pretend the money is invested in a non-registered investment account. Also, take all of this with a grain of salt. No return is assured. In short, we talk.
1) I would put my million in the Vanguard Equity ETF Portfolio (VEQT).
2) And then I would forget about it, and go back to work.
That’s all ?
That’s all.
On the surface, this investment may seem too simple to be ideal. When it comes to investing, we often believe that we have to make it complicated for it to have a chance of working.
However, as Warren Buffett recommends, this fund is well diversified. It contains the stocks of 13,514 companies spread across 51 countries around the world, and is weighted this way:
Canadian stocks: 29.1%
US stocks: 45.7%
International equities developed markets: 18.6%
International equities emerging markets: 6.6%
Allocations are maintained by automatic rebalancing. That is to say, Vanguard, the firm that manages the fund, periodically sells some of the stocks that are rising, and buys those that are falling. In doing so, it makes sure not to let certain stocks completely dominate the fund.
This fund is made up of 100% stocks. What is the return on stocks? Surprisingly, it has been fairly consistent over the centuries: it fluctuates between 4 and 5 percent more than inflation per year on average, William Goetzmann, a professor at the University’s business school, noted last year. Yale, on the financial podcast Rational Reminder. Mr. Goetzmann, among other things, studied the financial statements of companies founded in Toulouse in 1372 and 1373, and which survived until the 1940s. This gives between 7 and 8% return per year on average before inflation.
Check out the financial podcast show (in English)
A portfolio that contains both stocks and bonds is best suited for 99% of investors. But, well, like Warren Buffett, I have fun with this exercise, and I hypothesize that my ideal fund is held for several decades by an investor with ideal behavior, that is to say who ignores the increases and market declines.
For someone unsure of being able to live with the inevitable fluctuations (10% drops happen every year, and sooner or later a 50% crash is a certainty), less volatile versions of the fund, with lower expected returns , are available. These are the Growth ETF Portfolio (VGRO), which includes 20% bonds, and the Balanced ETF Portfolio (VBAL), with 40% bonds.
When it comes to management fees, Warren Buffett recommends looking for “low fees” because, just like bad investor behavior, fees harm returns. My fund would cost me 0.24% of the total investment size annually. To this, we should add 0.01% in irrecoverable withholding taxes on dividends paid by foreign companies contained in the fund, according to calculations by Justin Bender of PWL Capital.
So we’re talking about an annual fee of 0.25%, or $2,500 the first year for $1 million. That’s a fraction of what the asset management industry would charge to manage my million, and could range from $10,000 to possibly $20,000 per year – but then I would be entitled to support in the falls, advice, and maybe also a pair of tickets to see the Canadian from time to time… Everything has a price in life.
Why not do as Warren Buffett suggests and simply invest in the S&P 500?
It’s not ideal to have all your investments in a foreign currency: we live in Canada, we buy our groceries in Canadian dollars, so it’s desirable to have part of our investments in our economy and our currency.
Also, a recent study from the University of Arizona showed that the optimal portfolio for an investor from a small (financially speaking) country like Canada has historically been to have about a third of their investments in market stocks. domestic, and the rest internationally. The VEQT, VGRO and VBAL funds follow this orientation.
Read “A 100% stock portfolio? OK but… ”
This exercise is enjoyable to do. But, as I said above, no matter the fund, if an investor does not control his emotions, and if he is not patient in the falls which can easily last for years, he will not obtain the generous returns offered by the market for generations. It’s as nono as it gets.
The most valuable part of Warren Buffett’s advice?
It’s when he says, “And then I’ll forget about it, and I’ll go back to work.” »
So easy to say. So hard to do.