Do As I Say?

Bill Parrott |

Berkshire Hathaway held their annual shareholder's meeting in Los Angeles on Saturday led by Warren Buffett and Charlie Munger. The two held court on everything from Bitcoin to taxes. At one point, Mr. Buffett mentioned the twenty largest companies in the world by market capitalization. The list included powerhouses like Apple, Amazon, Facebook, Tencent, and Walmart. He wondered how many of these behemoths would be on the list thirty years from now. He then highlighted the top twenty companies from 1989, and not one of the companies made the current list. The 1989 list included IBM, Exxon, GE, and Merck.[1]

Mr. Buffett added that most people should invest in an S&P 500 index fund and ignore picking individual stocks because the top companies are constantly changing. Owning index funds gives you access to the world's leading companies, regardless of their size or location.

Despite Mr. Buffett's previous comments on buying an index fund, his stock crushed the S&P 500 by 114% for the past thirty years. So should you do what he says or do what he does?

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However, if we shorten the window to ten years, the S&P 500 beat Berkshire Hathaway by 39%.

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For the past five years, the index has outperformed Berkshire Hathaway by 33%.

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And, finally, for the past year, the two are locked in a dead heat.

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Investing is more than buying stock in Berkshire Hathaway or picking an S&P 500 index fund. Instead, investors should choose a globally diversified portfolio of index funds, including domestic, international, emerging, and small-cap stocks. Adding a pinch of bonds and real estate holdings will also help.

The United States accounts for 57% of the world's market capitalization.[2] US stocks trounced international companies for the past ten years by 184%, so why invest in a global portfolio? Because markets are perpetually moving. International markets outperformed US stocks during the first decade of this century – 2000 to 2010. And adding small caps can give your portfolio a boost. For the past year, small companies crushed large ones by 34%.

I agree with Mr. Buffett that most investors would benefit from a basket of index funds. Index funds are low-cost and tax-efficient. They also give you exposure to thousands of companies around the world. Another benefit of index funds is that you don't have to find tomorrow's winners. According to YCharts, there are 21,079 publicly traded securities. Is it possible to unearth tomorrow's best companies today? An arduous task, but if you owned several index funds, your odds increase dramatically. It's also less stressful.

For the past thirty years, a balanced portfolio of mutual funds consisting of 60% stocks, 40% bonds has produced an average annual return of 10.29%, and it has made money 83% of the time. A $10,000 investment is now worth $193,300.[3]

Mr. Buffett's advice is usually correct, so I recommend we follow it this time by investing a majority of our nest eggs in a basket of index funds.

"A low-cost index fund is the most sensible equity investment for the great majority of investors," said Buffett. "By periodically investing in an index fund, the know-nothing investor can actually outperform most investment professionals." ~ Warren Buffett

May 3, 2021

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM's custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren't suitable for every investor.











[2] DFA 2021 Matrix Book

[3] DFA Returns Web – 1/1/1990 to March 31,2021.