How the world’s best investor plans to invest his estate and what you can learn from it

Index funds are carefully constructed to track the performance of a specific index, without the influence of an investment manager who may deviate from the path. Source: Getty

As retirement planning expert David Kennedy notes in his exclusive column for us this week – and as your mum or dad probably told to you many years ago – money doesn’t buy you happiness.

You’re probably tempted to quip that you’d at least like a chance to test out that theory (who wouldn’t!) but this week’s question from a reader indicates we’d be likely to find out that it was true. Our reader has $950,000 in cash and superannuation but is concerned about making the best investment choice to fund their retirement.

Of course we’re not suggesting that our reader is deeply unhappy, but the question does demonstrate that merely having plenty of cash in the bank isn’t the key to a worry-free retirement because that cash comes with its own difficult questions.

Our investment expert Jim Kilkenny has suggestions for our reader but there’s a little line in his answer that could be illuminating for all of us. Jim, who has decades of experience in financial markets and knows every asset class like the back of his hand, chooses one of the most simple investment products when it comes to his own money: index funds.

(Index funds hold a portfolio of assets that is constructed to track the performance of a chosen index, such as the S&P ASX 200, so investors in the fund receive a return equivalent to that performance. There is no stock picking or marketing timing by an investment manager, which means the cost to investors in the fund are lower and their risks are typically spread across a broader array of assets.)

Jim’s in very good company on this. Legendary stock-picker Warren Buffett says he’s told the trustee of his estate to put 90 percent of his wealth into low-cost index funds that track America’s S&P 500 after he dies, for the benefit of his wife. You can read more of his thoughts on the benefits of this investment strategy – and plenty of other sage advice – on pages 16-21 of his 2013 letter to investors in his company Berkshire Hathaway.

Buffett’s message was underlined in an entertaining (OK, I’m a money nerd!) column in The New York Times this week that looks at the performance data of actively managed funds (in this case, bond funds, but the theory is the same), to find that most investors would’ve done better by simply sticking their money in an index fund. Writer Jeff Sommer wryly concludes that “most investors, this one included, are bunglers: we panic and exult at the wrong moments, impairing our chances of success”.

If that’s the case – and the data sure seems to say it is – the reader who sought Jim’s advice this week has no reason to beat themselves up over having lost money by picking the wrong stocks or for having trusted a stockbroker to lose money for them. They’re just like the rest of us!




IMPORTANT LEGAL INFO This article is of a general nature and FYI only, because it doesn’t take into account your financial situation, objectives or needs. That means it’s not financial product advice and shouldn’t be relied upon as if it is. Before making a financial decision, you should work out if the info is appropriate for your situation and get independent, licensed financial services advice.

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