Last year, Warren Buffett recommended his heirs put their money in Vanguard’s low-cost S&P 500 index fund once he’s gone.
And why not? From 1979 to 1999, it nearly averaged an 18% annual return. However, things have slowed dramatically in the past 15 years.
As a result, over the next two minutes, Steve McDonald reveals six other low-cost Vanguard funds investors can use to boost their annual returns.
Everyone, no matter how small the amount is, should have something put aside just for growth. Not generating income, not speculative money, just solid and, on a long-term basis, somewhat predictable growth. Our parents called it “rainy day” money.
And it’s especially important now in retirement. Because our life expectancies have increased so much, inflation – no matter how low it is right now – will eat up a sizable percentage of everyone’s assets. And none of us want to spend the last few years here wondering why we can’t afford the basics.
The single most popular investment for this purpose for many decades has been an S&P 500 index fund or ETF. Warren Buffett recently told his heirs, when he’s gone, to put all their money in one. That’s how popular and how much investors of all kinds have come to depend on it.
But the numbers don’t support this huge amount of reliance on one investment, or maybe complacency is a better word.
In 1999, the S&P 500 index fund was the single most widely held investment in the market. And why not? It had averaged almost 18% a year for the previous 20 years.
Talk about a setup for a complacency trap or, perhaps, the dog of tomorrow!
As has always been the case, last year’s winner is tomorrow’s bomb! And the S&P 500 is no different. For the last 15 years, it has averaged only 4.1% a year.
Maybe Buffett doesn’t like his kids all that much. He obviously doesn’t have much faith in their investing abilities.
Anyway, take a look at the list on your screen now. It’s the 15-year annual return for the other better-known indexes.
All have outpaced the S&P 500. And the small cap value combination and REITs have been the biggest winners.
Now, I know what you’re thinking… “Small cap value, REITs, hmmm… let’s load up on them!”
That’s just another of the “yesterday’s winner” traps being driven by our desire for one-stop shopping.
The point here is diversification.
Most of us would like to be able to be complacent about our money. We all want one place where we can just plop our money down, forget about it, go hit the ball for 15 years and still have a decent return. At least, our past behavior would indicate that.
And, at times, depending on the time period you are focusing on, it looks like a viable solution. But the numbers don’t lie, and if you want to have something for the latter part of your best years, spreading it out looks like it yields the best results.
Just be sure to have something out there growing in order to fill the void inflation will create. Not might or could, but will create! And don’t get sucked into the complacency trap. When you finally get off the links, you might find it has cost you everything.