An investment 2 steps cleverer than Buffett

Warren Buffett’s advice to people planning for retirement who are “couldn’t care less” investors or “know nothing” investors is to just use index funds.

His official ten year bet against hedge funds managers paid off when after ten years, the S&P 500 index beat all five hedge fund fund of funds it was compared against.

The problem with Buffett’s advice, and people like myself repeating him, is that most investors need more help than just being told to go look for index funds. They need (inexpensive) hand holding for two further steps. 

  1. Purchase index funds at a reasonable cost.

  2. Add bonds to de-risk your portfolio as you get older and rebalance the proportion between stocks and bonds annually - this is the traditional personal finance view.

Vanguard the index fund behemoth has released a family of funds called “Target Retirement Funds” where you merely pick your year of retirement and Vanguard takes care of the additional steps.

For example being forty-two, I would pick the Target Retirement 2040 Fund.

  • For 0.24% fees (yes, 0.24% - that is not a typo), Vanguard will buy you into a variety of US, European and developing markets index funds.

  • It also buys you a mixed basket of bonds (that are theoretically supposed to lower your risk) according to the year of retirement. For someone retiring in 2040 this would be a 77% equity/ 23% bond mix.

  • The fund then automatically rebalances the proportion of funds for you every year, all included for that quarter percent in fees.

Simple and clever!

Just a note to end I have no affiliation with Vanguard. In fact if they found me loitering in their office lobby they would probably call security.