May 15, 2014

Dear Friends,

Warren Buffettt has a seemingly great long-term track record and reputation for high integrity, so it’s natural that people believe he’ll give great information. While we know that he has planned for all his Berkshire Hathaway holdings to go to charity, he recently caused a stir by leaving to his wife, in his will, a recommendation to trustees that they invest 90% in the S&P 500 and 10% in short-term bonds.

His response to questions about this recommendation was part of a 3-hour interview on CNBC’s “Squawk Box”. When asked why he would recommend that, as opposed to investing in something that might yield higher returns, Buffett answered: “My widow will not be an expert on stocks. I wanna ensure she has a decent income.”

I have recorded a podcast addressing this topic in greater depth  and hope you will listen. But for those who prefer to read, I want to share some of my thoughts here.

Buffettt specifically mentioned Vanguard Index Funds, stressing the importance of keeping expenses low, and he made the point that the S&P 500 is good enough for his wife. Is this advice right for you, for your widow? Is it right to recommend to the trustees of your estate a similar strategy? What I want for you, and your heirs, is to get the best return you can without taking too much risk. I would question if Buffett’s 90/10 asset allocation is appropriate, and if you would be giving up too much return – without taking too much risk – by limiting yourself to the S&P 500.

Obviously, Buffett knows about Dimensional Fund Advisors(DFA), different asset classes and academic research. But, he chose a limited approach. Each of us has to decide how much risk are we going to take for how much return?

I just read a number of studies comparing the S&P 500 to Berkshire Hathaway. Over the last 15 years, the S&P 500 has made about two-thirds of Berkshire Hathaway. Go back even further and Berkshire Hathaway has about 50% more risk built into it in terms of volatility. Over the last 15 years, I see Berkshire Hathaway compounded at 6. 4% and the S&P at 4.2%. That 2.2% is a big difference.

But how would you have done if you had used DFA funds? I know not all of you can get into DFA funds but, for the sake of comparison, its blend of diversified asset classes produced a far better rate of return than either the S&P 500 or Berkshire Hathaway, with less volatility. These higher returns are life-changing differences.

More people will listen to Warren Buffett’s recommendation of the S&P 500 than to Paul Merriman and my recommendations for past 15 years, which include a broadly diversified portfolio. But when you know evidence from the past – and remember, there is no risk in the past – what you’re left with here today, for your own portfolio or to leave to survivors and charity, is to decide whether to follow Buffett’s recommendation or the recommendation for a broader group of asset classes likely to reward a higher rate of return over the years.

I am not Warren Buffett, and yet we’re all forced into a corner to make a decision about who we trust. Even with his integrity, I suggest you look to the academic community and see what they recommend. I have learned what I recommend from the academic community, and I try to bring it to you in easy-to-use and easy-to-apply fashion. The decision, as always, is up to you.

I hope that whatever decision you make turns out well for you and your family. And I hope that you will share mypodcasts, my free books, and the articles Rich Buck and I write weekly at MarketWatch, so we can expand the number of people we reach with this information.

To your success,


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