What You Can Learn from Warren Buffett’s Estate Planning

Passive investing can win.


Warren Buffett, one of the most successful investors of our generation, recently shed some light on his will in his latest Berkshire Hathaway (NYSE:BRK-A)(NYSE:BRK-B) 2013 shareholder letter. While describing parts of his will, he managed to reveal a shocking but easy-to-follow piece of investment wisdom that anyone can use to their benefit.

In what likely came as a surprise to many was the fact that the billionaire Buffett had simply endorsed a portfolio of cheap and inexpensive index funds for his wife after his passing. This is what he wrote:

One bequest [in the will] provides that cash will be delivered to a trustee for my wife’s benefit… 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.”

So, straight from the horse’s mouth: Investing in a boring index fund can be a far better option for most as opposed to them picking their own shares and actively try to beat the market.

Why index funds rock

According to the findings of Jack (John) Bogle, the founder of Vanguard – currently the world’s largest mutual fund company –  the trick behind earning big bucks is to invest passively with a long time horizon as opposed to picking actively-managed funds. For some background, a passive investment is one that simply tracks a major market index while an actively managed fund is one that’s run by a fund manager who’s trying to pick shares and different kinds of investment vehicles.

Index funds have three major advantages over actively-managed funds:

1. A passive approach – When you practise dollar-cost averaging into a passively-managed fund, all you need to do is follow the market and you can continue with your daily life as your nest egg gets bigger. No corporate analysis or an understanding of accounting, financial theory, or portfolio policy is required.

2. Better performance – Research has shown that more than 70% of actively-managed funds are unable to beat the market on a consistent basis over the long run. That’s why investors like Warren Buffett have been known to pass on such advice to the layman: If you can’t beat the market, follow the market!

3. Low costs – Passively-managed funds often have much lower expenses as compared to an actively-managed fund. Over the long-term, that 1 or 2 percentage point difference in terms of expenses can provide a significant competitive edge for passively-managed funds over actively managed funds. With funds, low costs can be strongly linked to superior long-term performance (a penny saved is a penny earned).

Now, for the everyday retail investor, the main question would likely be how and where to find such avenues to kick-start their investment journey. Well, here are two such index funds: The Nikko AM STI ETF (SGX:G3B) and iShares MSCI Singapore ETF (SGX:I19). The former tracks the Straits Times Index (SGX: ^STI), one of the most widely-followed stock market benchmarks in Singapore, while the latter pegs itself to the MSCI Singapore Index. With both, you can invest in them like any share that’s traded on a stock exchange though there may be some difficulties in regard to investing regularly due to the considerable amount of money involved for even a minimum of 1 lot (which consists of 1000 shares).

The other way will be to invest in regular savings plans provided by many banks such as OCBC and DBS Group Holdings. With those, a minimum of S$100 can get you started. So, what are you waiting for?

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor James Yeo doesn’t own shares in any companies mentioned.