Monday, March 06, 2006

Warren Buffett: Beware brokers who want your money - Mar. 6, 2006

FORTUNE: Warren Buffett: Beware brokers who want your money - Mar. 6, 2006

Warren Buffet, the legendary investor is not making many friends with this piece as he essentially tells people to fire their money managers and index. I agree. You may think it wierd that a financial planner who makes his living by charging fees would agree with Buffett on this matter and you'd be right, except that I am not like most planners. As Buffet alludes to most planners charge high fees and attempt to find "money managers" who will outperform, only to disappoint. All these additional costs are referred to as "friction" and reduce your returns by about 20%.

Essentially, to invest correctly you should structure your portfolio to avoid frictional costs as much as possible, which is exactly what I do by using institutional (low cost) index funds that are designed to give us the returns of the asset classes we want to invest in. Indexing is the best way to keep the returns that the market gives over time.

Between Dec. 31, 1899 and Dec. 31 1999, the Dow rose from 66 to 11, 497, a growth rate of 5.3%, plus you would have recieved dividends. If the Dow continues at such a pace, it should reach 2,000,000 by Dec. 31, 2099 - how much of that return will you keep? Keep costs low, hire a planner with reasonable fees (well under the typical 1%) and avoid all the sexy sounding investments like Hedge Funds and Private Equity.

Scott Dauenhauer, CFP, MSFP