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By John Wasik
CHICAGO, March 10 (Reuters) - While it is hard to knock theadvice of Warren Buffett, whose annual letter to BerkshireHathaway Inc shareholders recently lofted down from themountain of capitalism, some of his tips can be tweaked.
Among the many nuggets of wisdom in the Berkshire report wasa recommendation from the company's chairman to the trustee ofhis estate that 10 percent of the cash be invested in short-termgovernment bonds and 90 percent in a "very low-cost index fund(Vanguard's)."
Buffett is spot on about holding onto an index fund andavoiding the exorbitant fees of active managers. But we shouldlook at his advice a bit more closely.
In an earlier Buffett blog on Fortune.com, the legendaryinvestor cited the ticker symbol for the Vanguard 500 Index fund. The fund charges 0.17 percent in annual expenses andowns the top 500 U.S. stocks by market capitalization, such asApple Inc, Exxon Mobil Corp and Google Inc. As of Friday, it was up about 2 percent year to date.
In line with Buffett's penchant for penny-pinching and focuson long-term returns, I was wondering if you can find a betterindex fund. You can certainly find a cheaper fund that tracksthe Standard & Poor's 500 stock index.
Vanguard's exchange-traded S&P 500 Index fund charges only 0.05 percent annually and trades commission-freethrough many discount brokers, include Vanguard.
I would also call into question Buffett's selection of theVanguard 500, which picks a near-static basket of the mostpopular U.S. stocks, many of which could be overvalued.
What might appeal more to Buffet's bargain-picking acumenwould be a fundamental S&P 500 fund like the Guggenheim S&P 500Equal Weight ETF, which owns roughly equal percentagesof stocks in the index, including lesser-known companies likeLSI Corp, Harman International Industries and F5Networks Inc.
Instead of overweighting the most popular stocks the waymost S&P 500 funds do, the Guggenheim fund tilts in the favor oflower-priced companies that pay regular dividends. This strategybeat the S&P 500 index for the past decade by almost twopercentage points. It is up 3 percent year to date, comparedwith about 2 percent for the S&P 500, and costs 0.40 percentannually to own.
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Even though Buffett is recommending them, far too manyinvestors may think index funds are too staid for their tastes.They will want to achieve stellar returns like Buffett has overthe past 50 years.
Although it is hard to quibble with Buffett's compoundedperformance at Berkshire Hathaway - the overall gain is 693,518percent from 1964-2013 - the big jumps came quite a while ago.
Berkshire now appears to be more index fund-like, at leastin terms of overall return. For the last four of the last sixyears, the stock has underperformed the S&P 500.
Is Buffett losing his swagger? For the sake of clarity, itshould be noted that the S&P index returns are pretax, whileBerkshire's are after taxes, so Buffett still has the edge inthe long term. Still, would it make sense to invest in BerkshireHathaway now rather than just stay in an index fund?
While most of Berkshire's investors and Buffett's manyadmirers want to see the chairman live forever, most of his besttrades, deals and holdings remain in the past. This despite hisstatement in the Berkshire annual report that "book value andintrinsic value will outperform the S&P in years in which themarket is down or moderately up."
Yet you cannot expect the company, especially underBuffett's still-unnamed successor, to continue its winning ways.
For the interim, most of Buffett's advice is solid, but withsome caveats. I would still buy the lowest-cost index fund butwould make sure I had a basket of non-U.S. stocks in developedand emerging markets in a total market international fund likethe iShares Core MSCI Total International Stock ETF.The fund, which charges 0.05 percent annually in managementexpenses, tracks an index of non-U.S. stocks like Nestle S.A., Roche Holdings AG and HSBC Holdings PLC.
The same thinking on broad global diversification wouldapply to my bond holdings for my short-term cash needs - money Ineed in a year or less - in a short-term Treasury or corporatebond or money-market fund.
I would also want part of my income portfolio in Europeanand emerging-markets bonds, municipal bonds and TreasuryInflation-Protected Securities, high-yield corporate debt andfloating-rate notes for inflation protection.
All of this begs for more index fund investing across theboard. So you should not mistake Buffett's one gem of advice asa one-stop solution. There is a simple formula behind it, butyou need to apply it broadly.
