Warren Buffett is widely considered to be the greatest stock pickers and investors of our time. As a result, when the Sage of Omaha speaks, people usually take notice.
So, when Mr Buffett revealed his retirement planning advice, many investors took note.
Leaving a legacy
Earlier this year, within his annual letter to Berkshire Hathaway shareholders, Warren Buffet gave us a glimpse into his retirement plan.
Actually, it was not advice for his retirement but rather advice for the trustee whose duty it will be to administer the money Buffett’s is leaving for his wife — the majority of Buffett’s wealth will go to charity.
Here’s Buffett’s advice:
“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.”
This is not the first time Buffett has advocated the use of index funds to accomplish long-term investment goals. Buffett has made his stance on stock picking and investing for the future very clear in the past:
“…If you like spending 6-8 hours per week working on investments, do it. If you don’t, then dollar-cost average into index funds. This accomplishes diversification across assets and time, two very important things…if you invested in a very low cost index fund — where you don’t put the money in at one time, but average in over 10 years — you’ll do better than 90% of people who start investing at the same time…”
Buffett’s strategy is simple and easy to replicate. Still, the S&P 500 is an American stock index, which some investors may find disconcerting.
However, for UK investors there is a simple solution, buy and hold a FTSE 100 (FTSEINDICES:^FTSE) index tracker, or, for more diversification, a FTSE All-Share index tracker.
Returns of the index
It’s easy to see how Buffett’s advice will benefit your portfolio. Over the past 29 years, the FTSE 100 has returned around 5.5% per annum, excluding dividends. Meanwhile, the FTSE All-Share has returned closer to 6% per annum. Including dividends these returns would be closer to 10%.
And remember, these returns exclude the impact of dividend reinvestment. According to my figures, a £1000 investment in the FTSE All-share, yielding 3% per annum, with capital growth of 5.9% would turn £1,000 into £8,200 over a period of 30 years.
Of course, this is excluding costs, but there are some very low cost trackers out there for you to take advantage of. In particular, BlackRock 100 UK Equity Tracker, has a current management fee of 0.16%, HSBC FTSE 100 Index has a fee of 0.17% and Fidelity Index UK charges 0.09%. For the FTSE All-Share, Vanguard FTSE UK Equity Index charges 0.15%, BlackRock UK Equity Tracker offers index replication for 0.16% and the Legal & General Tracker Trust charges 0.16%.
What about bonds?
But what about the bond side of the equation? Well, with interest rates at all-time lows, bond yields are unattractive. Nevertheless, with interest rates projected to start climbing over the next few quarters it could be time to get in, ahead of the crowd.
Two of the best gilt funds out there are the Allianz Gilt Yield fund, with an annual management charge of 0.5-% and a current yield of around 2.2% and the Schroder Gilt & Fixed Interest fund, which currently charges an annual management fee of 0.50% and yields 3.2%.
