Should You Invest Like Uncle Warren?

Hands down, Warren Buffet is one of the most successful investors of all time. And the media loves to interview him because he’s incredibly pithy and quotable. But sometimes the context of Buffet’s pronouncements gets lost in the noise and folks think they ought to copy his investing style.

One of my clients recently asked about this, having come across some Buffet “advice” to invest 10% of a portfolio in short-term government bonds. A deeper look revealed it wasn't advice for us mere mortals. Rather, when he finally takes his ukulele playing to the wild blue yonder, he recommends his wife and trustee invest her trust funds: 90% in an S&P500 stock index fund and 10% in short-term government bonds. And then just let it ride over the long term.

Now that puts an entirely different spin on it, right? How many investors—particularly “second-halfers”—would be comfortable with a 40%-50% drop in their portfolio? (that will periodically happen in a 90% stock portfolio) It takes a strong stomach to embrace that kind of volatility. But study after study shows that most folks just can’t do it. They have a “Behavior Gap,” earning much less than the average returns over the long term because they chase hot investment performance once it’s too late and then panic-sell after the markets are road pizza.

That aside, even Buffet himself has evolved in his investing style over the decades to adapt to the changing environment and the challenges of finding investments large enough for his massive wealth. Most of the rest of us don’t have that particular problem.

So if you’re hands-on managing your portfolio and interested in learning all you can about investing, by all means: read up on Buffet, his history, evolving investment styles, Berkshire Hathaway’s annual report, and so on. But please don't try to copy what you hear him say to the media. Your situation is not remotely like his and you need to do what’s best for you.