Thoughts, ideas, suggestions and education from financial adviser Jim Ludwick, Founder of MainStreet Financial Planning, Inc. of Odenton, MD; Washington, DC; New York City, and Santa Barbara, CA

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Wednesday, March 5, 2014

Did I Make a Big Mistake With Your Portfolio?

Watching PBS’s National Business Report recently, I saw an interview with Warren Buffet.  Now that kind of interview always gets my attention.  I stopped multi-tasking to pay rapt attention to what he had to say.

Mr. Buffett, the most recognized and successful investor of our times, discussed some of the provisions in his will in his latest letter to clients.

“My money, I should add, is where my mouth is: What I advise here is essentially identical to certain instructions I've laid out in my will. One bequest provides that cash will be delivered to a trustee for my wife's benefit. (I have to use cash for individual bequests, because all of my Berkshire Hathaway shares will be fully distributed to certain philanthropic organizations over the 10 years following the closing of my estate.) 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. (I suggest Vanguard's.) I believe the trust's long-term results from this policy will be superior to those attained by most investors -- whether pension funds, institutions, or individuals -- who employ high-fee managers.”

Should I treat some retired clients like Warren Buffet is going to treat his widow?

As I pondered this very, very simplistic strategy, I recalled the advice of Rick Ferri, William Bernstein, Charles Ellis, and Larry Swedroe whose wisdom I have followed for more than a decade as an hourly financial advisor. Maybe I was being too complex for some of my clients in the withdrawal phase?

Now, what is too complex, you ask?  Well for starters, we deal with lots of retirees, both single and married, who don’t want to manage their own investments, but also don’t want to pay a manager one percent or more for this task.  They want to pay us an hourly fee instead.

As a caveat, just like Mr. Buffett’s widow, the portfolio is probably not the sole source of income, but still a major generator of cash to live on beyond social security and perhaps a small pension.

We usually offer a recommendation of three to eight index funds or exchange traded funds tied to indexes as part of a withdrawal strategy that includes three years of federally insured cash (think CDs and high yield savings accounts)  for short term withdrawal.  That way, our clients don’t have to worry day to day about the stock and bond markets.  (Think Ukraine and its impact on the markets lately.)

So, to my conclusion, I think maybe I’m going to recommend reducing the number of holdings for some retirees who fit the situation described by Mr. Buffett.   Recently, Dr. Jim Dahle in his blog The White Coat Investor reported on a physician couple who had only invested in an S&P 500 index fund for the past 10 years and have done extremely well.  Now that might not work for all of our retirees, but it did give me more information to digest and encouraged me to surface this strategy with some of our clientele.

So what do you think we should do?  I look forward to your comments.