Warren Buffett Said What?

Warren Buffett Said What?

Unfortunately, investors look to Pop Culture Finance to increase their knowledge on investing.  Pop Culture Finance or PCF makes many wrong assumptions and speaks in absolute truths.  For example, one assumption they make is that everyone has the same risk level which in this day in time is so far from the truth. PCF articles write as if everyone should invest and take the full amount of risk. After investors have gone through two bear markets in the last 17 years, we have become more and more a risk averse investment community.

They also speak in absolute truths as if their beliefs that are expressed in the media is the Gospel and the only way to go. There is only one absolute truth when it comes to money that there are no absolute truths – just opinions.

A recent quote by Warren Buffett illustrates my point and absolutely makes no sense!

“Buffett, meanwhile, says an index fund portfolio of 90 percent S&P 500 and 10 percent Treasurys is probably good enough for most investors — that’s how he is recommending his wife invest.”

Now who am I to disagree with Warren Buffett? However, I will.  First, a 90% investment into a S&P 500 index fund and a 10% Treasury Fund barely provides any diversification. Further, “probably good enough for most investors” remark is also off base. Once again a remark that lumps everyone into the same risk profile. On a scale from 1 to 10 with 10 being the riskiest that would probably register a risk level of 9.


If you run the numbers, you will see that this approach yields very little value from diversification. I ran a Morningstar illustration investing 90% S&P 500/10% Treasurys portfolio versus 100% S&P 50 portfolio verses a 50%/50% portfolio (equal weighting stocks and bonds). This was run during the financial crisis which I used a date of 10/31/07 to 3/31/09.  I used VFINX for the S&P 500 fund and VFITX for the Treasury fund.

If an investor invested 100% into the S&P 500 fund the return for the period above would be -46.67%.

If the investor invested 90% into the S&P 500 fund the return for the period above would be -40.23%.

As you can see that approach barely yields any diversification. One might as well go 100% because both approaches showed a lost over 40%.

Now, if you went 50/50 in stocks and bonds the return would have been -14.23% which is offers up way more diversification.

Just realize that there are assumptions being made for you when you read these PCF articles most of which raises your risk level. One would think that Warren Buffett’s advice is as good as gold. Unfortunately, most of these big investors have lost touch with the common everyday investor.

NOTE:  Returns in above example where created through Morningstar.  Past history doesn’t guarantee the same results in the future. This was designed as an educational piece and in no way is to be taken as strategy or advice. Seek the advice from a professional before making investment decisions. In addition, there was no rebalancing during the period or any additional fees applied.

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