Buffett’s 90% S&P 500 Plan Highlights the Cost of Fees
Warren Buffett instructed the trustee handling his wife’s inheritance to put 90% into a low-cost S&P 500 index fund and suggested Vanguard. A separate…
Warren Buffett directed the trustee handling his wife’s inheritance to invest 90% in a low-cost S&P 500 index fund, putting a personal instruction behind his long-standing case for simple investing. His 2013 shareholder letter suggested Vanguard for the fund and allocated the remainder to short-term government bonds.
The advice has a practical cost lesson. A published example says investing $300 a month for 30 years at a constant annual return of 9.5% would grow to about $610,000, while a 1% annual fee would reduce that outcome to about $495,000.
Fees bite.
Buffett’s instruction was for the trustee managing his wife’s inheritance, not a promise of returns for every investor. The source emphasizes that the $610,000 figure is a straight-line illustration: actual market returns fluctuate, and no real market delivers 9.5% every year.
What Buffett told the trustee
In his 2013 shareholder letter, Buffett advised putting 90% of the inheritance into a low-cost S&P 500 index fund. The remaining portion would go into short-term government bonds. He suggested Vanguard.
The bond allocation has a role in the plan described by the source. Someone drawing money from a portfolio needs to sell investments to cover expenses. A reserve in bonds can provide another source of funds when stocks fall, avoiding the need to sell shares at depressed prices, according to the article.
The instruction is notable because Buffett built Berkshire Hathaway into a company worth roughly $1.1 trillion, yet recommended an index fund for this family inheritance. The source presents the contrast as a reminder that a straightforward, low-cost approach can be different from selecting individual stocks.
The fee difference in the monthly example
In the illustration, an investor contributes $300 a month to an S&P 500 index fund for 30 years. At a constant annual return of 9.5%, the account reaches about $610,000. The investor contributes $108,000; the remaining $502,000 comes from compounding, or returns earned on previous growth.
The article says much of the gain appears in the final decade, as returns build on a larger balance. But that pattern depends on the assumed steady return and should not be read as a forecast. Market gains and losses do not arrive in a smooth line.
Fees can also change the outcome substantially. Under the same monthly contribution and time period, the source’s example says a 1% annual fee cuts the final amount to about $495,000. The difference is roughly $115,000—more than the investor’s total contributions.
The article identifies the Vanguard S&P 500 ETF, or VOO, as charging an expense ratio of 0.03%. It also reports that the fund’s share price rose about 324% over the past 10 years. Those figures describe the fund and its cited past performance; they do not establish what it will return in the future.
An S&P 500 index fund tracks roughly 500 large U.S. companies weighted by market value, according to the source. Rather than trying to pick winning stocks, the fund follows the index, an approach the article connects with lower operating costs.
For investors, the figures make two parts of Buffett’s instruction especially concrete: the choice of a low-cost fund and the bond reserve. The example’s outcome changes sharply when a 1% fee is introduced, while the source warns that actual returns will vary from year to year.
Source: finance.yahoo.com
