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December 13, 2016The Buffet Challenge – A Million Dollar Bet
The greatest challenge when it comes to investing is simply this… do nothing. It goes against everything we know. Yet it’s the best decision investors looking to attain individual goals can often make. Goal-based investments align your investment choices with your long-term goals for life. So instead of always trying to maximize returns, you are aiming to maximize your life. The point of this approach is to focus on achieving your goals at a quicker pace, and it works because your risk tolerance isn’t dictating your investment strategy…your goals are.
Recently we’ve seen the markets make huge strides, hitting all-time highs, and I am telling you to do nothing. Here’s why.
If you’re a history buff you may have heard of the Manhattan Project in the 1940s. If you’re not, you can find more about that here. It was during this time of the research a group of high school girls was brought in to monitor dials on calutrons. The young ladies were given very specific instructions to which they were to adhere to. What they learned was quite mind-boggling to some. These young, uneducated girls, many of whom had not even graduated from high school, followed the rules not making adjustments, and received better results than the Ph.D.’s that were trained in that discipline. The conclusion made was that the more educated people are, the more likely they are to think they can outperform the standard. The investing world is no different.
A real-world example of that is the challenge made between Warren Buffet and hedge fund manager Tom Seides several years ago. Hedge fund managers, such as Seides, are considered some of the most elite money managers in the world… they have access to inside information. Buffet dared Seides to outperform his pure index fund investment. Each man invested $320,000 in their respective arena. After eight years, Buffet wasn’t just winning; he was trouncing the competition. In only two of the last seven years, the hedge funds outperformed the market indexes. In fact, they are significantly below the index. The point is just because someone is an expert in a field doesn’t mean they’re always going to return better results.
Does this mean if you invest in a simple index fund you’ll see the same returns as Warren Buffet? Not even close. Warren Buffet has done something few will ever accomplish in investing. Choosing a simple index fund and going broke is the equivalent of me thinking I can be a gold-medal-winning Olympic swimmer. If I can watch Michael Phelps, have the same coach as Phelps, eat the same food as him, I can then achieve the exact same results. It’s just ludicrous. Yet in investing many young investors believe they can do it on their own when every study out there proves it cannot be done. That’s where working with a CERTIFIED FINANCIAL PLANNER™ can help.
Vanguard Financial Advisor Services did a study that the average investor returns 3% more working with an investment advisor than they do on their own. So if you were to go in and follow the index funds you may get a decent return, but those that work with an actual wealth planner should see better returns according to the Vanguard study. The reason is that most good CFPs® realize the best thing they can do for a client isn’t beat the markets; rather it’s controlling emotions and keeping them from encouraging bad decisions. Our task is to help them stay focused on their long-term goals by not allowing them to play with fire… because inevitably they’ll get burned. We’re keeping them from being like the Ph.D.’s in the Manhattan Project, and we don’t allow them to get caught up in trying to be the next Warren Buffet either. We keep it simple because an “apathetic” attitude shows time and again you are more likely to end up with a 3% better return.
However, I know doing nothing is counter-intuitive to every other aspect of life. If we want to lose weight, we diet and exercise to reach those goals, but it’s exactly the opposite when it comes to investing. The more we play and finagle, the worse the results are going to be. Your planner is here to keep you from thinking you can outperform because, statistically, it can’t be done.