Do You REALLY Want to Invest Like Warren Buffett?

Jim Lorenzen, CFP®, AIF®

Picture this:   After a long talk with your financial advisor, s/he leans back and says, “I think you should put 90% of your money into stocks and 10% into short-term government bonds.”

Your jaw drops, “What?”

Who could blame you?  But, according to an excellent recent article by Craig L. Israelsen[1], those were Warren Buffet’s 2013 letter to Berkshire Hathaway shareholders disclosing his instructions to a trustee for the management of the final bequest to his wife.

Retire with all your money in only two asset classes?   I wonder how that would sound to the regulators if an advisor made that recommendation to clients?

Dr. Israelson decided to test this concept using a $1 million retirement portfolio with annual withdrawals determined by the required minimum distribution (RMD) over a 25-year period – and he tested four different portfolios:   (1) A seven-asset portfolio[2], (2) 60% large-cap US stocks and 40% aggregate bonds, (3) 90% large-cap US stocks and 10% short-term government bonds, and (4) 100% cash.   His time frame was the 49-year period from 1970 to 2018, which contained 25 rolling 25-year periods.

Guess what? Buffett’s portfolio won!  While all portfolios were solvent after 25 years, the Buffett model had the highest average ending balance after 25 years of withdrawals.  It also provided the highest average annual withdrawal and the highest average of total withdrawals over 25 years.

The operative word, however, is average.   The Buffett model also had the widest swings of all the other portfolios; but, when you have more than a billion dollars, who cares?

Most of us living in the real world of making our money last may love the destination; but, we may not like the ride.

Jim

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[1] Financial Planning, May 2019, p. 50.  Craig L. Israelsen, Ph.D. is an executive in residence in the personal financial planning program at the Woodbury School of Business at Utah Valley University and is also the developer of the 7Twelve portfolio.

[2] Equal portions of large-cap US stocks, small-cap US stocks, non-US stocks, real estate, commodities, US bonds, and cash.


Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and an ACCREDITED INVESTMENT FIDUCIARY® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

RMDs Rules About to Change?

Jim Lorenzen, CFP®, AIF®

The government is facing huge deficits and a building national debt.  So, the latest bid to re-arrange deck chairs, the House recently passed The Setting Every Community Up for Retirement Enhancement Act of 2019.   They’re calling it The Secure Act.

According to Wealth Management, it’s not law – it’s just a bill that’s passed the House and the Senate will pass its own version at some point before it goes to committee for reconciliation.  Nevertheless, here’s what’s in the House bill:

  1. Retirement accounts would be forced to distribute all benefits within 10 years after the employee or owner dies.  This would apply whether or not the deceased had reached his/her required beginning date.   What this does, of course, is reduce the value of inheritances.  No special provision addresses trusts.
  2. Determination of a plan’s beneficiary being an eligible designated beneficiary happens on the date of the employee’s or owner’s death.
  3. Some charities will adapt to the 10-year rule by naming a charitable remainder unitrust (CRUT) as a beneficiary, permitting tax deferral over the tern of the CRUT and increasing the value realized by the non-charitable beneficiary. A present value analysis can help determine whether the benefit to the family exceeds the use of the 10-year rule.  Some may adapt by making lifetime qualified charitable distributions – direct transfers of up to $100K/year from an IRA to a qualifying charity after age 70-1/2.

It’s a long way from being law yet; but, it’s good to know what they’re up to.

Jim

Jim


Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and an ACCREDITED INVESTMENT FIDUCIARY® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.