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I’m taking on Warren Buffett’s Million Dollar Bet

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I'm taking on Warren Buffett's Million Dollar BetI’m taking on Warren Buffett’s million dollar bet. He beat the geniuses on Wall Street last time, but I feel good about my chances this time around. What’s this bet about? Read on…

Warren Buffett’s bet

In 2007, Warren Buffett made a million-dollar bet that a low cost stock index fund would outperform a collection of hedge funds over a 10-year period. He officially won at the end of 2017.

Warren Buffett picked VFINX and it gained 123% in 10 years (before tax.) Ted Seides of Protégé Partners picked 5 hedge funds. They gained just 24% over the same period. Passive investment won that round by a mile. VFINX did great because we’ve been in one of the longest bull markets in history. Hedge funds usually work better with more volatility. However, they also charge high fees which eat into the gains. The standard hedge-fund fee structure is 2% of assets and 20% of the gains each year. Jeez, that’s highway robbery. No wonder the hedge funds lost so badly.

VFINX performance

Coincidently, I also used VFINX in my previous post – What if you always maxed out your 401k? If you maxed out your 401(k) over the last 10 years, you would have about $350,000 in your retirement account today. Your 401(k) is an amazing tool. You need to read that post if you aren’t maxing out your 401(k) contributions.

How I will beat Warren Buffett

By now, you’re wondering how I’m going to beat Warren Buffett’s pick. It isn’t easy to beat the market consistently. The geniuses on Wall Street can’t even do it. Who does Joe think he is? Well, here is my pick – the RB40 fund. I’m going to pit our net worth against VFINX.

Hey, that’s cheating! I disagree. The RB40 fund is just like any investment. We have passive income from various investments. We have expenses just like any business. Sure, we have earned income to goose our net worth, but businesses raise money through bond and equity sales. Your personal finance is more similar to a business than you think.

What are my chances?

I’m comfortable with my chances against VFINX. Our track record is good. Over the last 10 years, the RB40 fund grew by 295% compared to VFINX’s 123%. That’s a huge margin. We didn’t win every year, though. In 2017, our net worth increased 15% while the VFINX gained 22%. I still like my chances because we came out ahead over the long haul. The next 10 years won’t be as easy as the last 10, though.

Beating VFINX at this point in my life won’t be easy. 2018 is vastly different than 10 years ago. In 2007, I had excellent income and I invested all the extra money I could. Back then, my new investment was a significant percentage of our net worth. Today, we still invest as much as we can, but new investment barely makes a dent in our net worth (1-3% annually). It is practically impossible to match my old rate of growth because our net worth is higher now.

Also, I’m more conservative. We have bonds, our house, rentals, and other investments that usually lose to the stock market. That’s just part of getting older. You get more conservative and try to diversify. This could work out in my favor, though. The stock market is going to have a big correction sooner than later (1-3 years). It’s better to be more conservative when the SHTF.

Lastly, Mrs. RB40 will retire within the next 10 years. I’m not sure when, but we won’t be able to add new money after she stops working. This will slow our net worth growth.

My bet

Okay, I might as well put some money on it. Warren Buffett and Ted Seides invested $320,000 each for the pot. The winnings are worth $2.2 million dollars now which will go to Girls Inc. It’s for a good cause.

Mrs. RB40 would kill me if I put $320,000 on the line so I’ll have to cut off some zeros. How about $320 invested in I Bonds? If Warren Buffett takes up my bet, then we should have $1,000 by 2028. I’m waiting to hear back from him. The winner can pick which charity will get the pot.

I Bonds pot

Oh, I’m not alone. A few other bloggers think they can beat Warren Buffett’s pick too. See their picks.

My Bet With Warren Buffett by Dividend Growth Investor.

Would You Take The Warren Buffett Bet?  by Carl at 1500days.com.

Challenging Buffett’s 10-Year Bet by Nick McCullum at SureDividend.com.

Can you beat VFINX?

What about you? Can you beat VFINX? I think most young people can do it if they put their minds to it. It is much easier to grow your net worth when you’re starting out. Here are my predictions about your net worth.

  • Millennials will make huge gains over the next 10 years and should handily beat VFINX.
  • Gen X will do pretty well too. They are hitting their peak earning years and should be able to grow their net worth. However, they have a lot of expenses too. Some will beat VFINX and some won’t.
  • Baby boomers are going to retire over the coming decade. It’s going to be tough to beat VFINX in that position. They need to withdraw from their retirement account to fund their lifestyle. Also, they probably will be much more conservative with their investments because they’re older. I think most Boomers will lose to VFINX over the next 10 years.

Of course, this is a lot of generalization. Everyone’s personal finance is unique. Anyway, everyone should keep track of their net worth. You can easily do it by signing up with Personal Capital. That’s where I check my net worth every day.

Do you think you can beat VFINX over the next decade? It shouldn’t be too difficult if you’re young. Go for it!

Personal Capital is a great free tool for DIY investors. It connects with your banks and investment accounts to give you the big picture of your finance.

Personal Capital

It only takes a couple minutes to set up and you can sign up for a free account here. They also have great tools like the Retirement Planner and Retirement Fee Analyzer. Check them out.

The following two tabs change content below.
Joe started Retire by 40 in 2010 to figure out how to retire early. He spent 16 years working in computer design and enjoyed the technical work immensely. However, he hated the corporate BS. He left his engineering career behind to become a stay-at-home dad/blogger at 38. At Retire by 40, Joe focuses on financial independence, early retirement, investing, saving, and passive income.

For 2018, Joe plans to diversify his passive income by investing in US heartland real estate through RealtyShares. He has 3 rental units in Portland and he believes the local market is getting overpriced.

Joe highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help every investor analyze their portfolio and plan for retirement.
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{ 56 comments… add one }
  • Chris Urbaniak @ deliberatechange.ca January 11, 2018, 3:14 am

    Hi Joe – Good luck! I look forward to following your progress.

    One interesting note: You mentioned that hedge funds charge around 2% in fees + 20% of gains. What do “normal” mutual funds, etc., typically charge in the US? In Canada most of them charge 2-2.5%! So here up north it is super important to take a low-cost indexing approach.

    • retirebyforty January 11, 2018, 9:35 am

      Thanks! Vanguard funds charge very low fees – 0.1% to 0.9%. Active funds are more expensive, but I’m not sure how much they charge. Maybe 1-2%?

  • Chris @ Duke of Dollars January 11, 2018, 3:20 am

    I was glad to see he had beat the hedge funds with the index fund, then donated the money to charity. The organization said they would be able to really make an impact with the money!

    Curious question, why do people with so much money choose hedge funds? Does it have to do with anything other then growing their assets? If so, I find it interesting they do it over index funds, when most of them are definitely capable of looking up investing strategies on their own.

    • retirebyforty January 11, 2018, 9:37 am

      I think when you have a sizable net worth, you get more conservative because the pain of loss is greater. Hedge funds should help in that regard, but the fees are just too high. Not worth it. Also, high net worth individuals probably enjoy delegating.

  • Caroline January 11, 2018, 3:20 am

    Good luck Joe! I will put a reminder to check in 10 years:)

    • retirebyforty January 11, 2018, 9:37 am

      I’ll do an update every year. At least, check back once per year. 😉

  • [email protected] January 11, 2018, 3:57 am

    I was all ready to take the Warren side of the bet against you until you said you were including your earned income in it. Based on these rules, I should also crush the S&P 500 over the next 10 years. I’m hoping to be FI In 10 years so beating it in years 11-20 would be unlikely.

    • FullTimeFinance January 11, 2018, 5:07 am

      Definitely and interesting way to look at return. But… you haven’t added in the value of one of your assets here so your cheating. To be correct how do you value your abilities and earnings potential?

    • retirebyforty January 11, 2018, 9:38 am

      I don’t think earned income will be a huge factor going forward for us.
      Good luck on your FI journey!

  • Maverick January 11, 2018, 4:12 am

    With all due respect, um, I don’t think so Joe. I realize your post is tongue in cheek, but I believe your analysis is incorrect. I’ve only been tracking my net worth against a benchmark in the last 5 years. My benchmark is the S&P Index with dividends (3rd column from left) http://en.wikipedia.org/wiki/S%26P_500.

    Since I also hold some bonds and cash instruments, I only beat the index once in the last 5 years, that was in 2015.

    • retirebyforty January 11, 2018, 9:40 am

      It won’t be easy, but I’ll try. It’s really a win-win-win situation. Nobody loses.
      If I win, my charity will get a donation and our net worth will be higher.
      If I don’t win, Girls Inc. will get a donation and our net worth will still be higher than now. 🙂
      Good luck with your net worth.

  • Maverick January 11, 2018, 4:16 am

    Oh, and you can place your bet here…
    http://longbets.org/
    🙂

  • Lazy Man and Money January 11, 2018, 4:16 am

    I would call you out for cheating, but I love the overall idea. I am not if the RB40 fund was ever open to external investing like hedge funds.

    Like you, we handily beat the index over the last ten years. Earning more money at a young age, makes it much easier.

    I wouldn’t bet against you, and my guess is that Warren won’t either ;-).

    • retirebyforty January 11, 2018, 11:43 am

      It’s going to much tougher the next 10 years, but I think we have a good chance. After that, it would be really difficult.

  • Tom @ Dividends Diversify January 11, 2018, 4:25 am

    Hi Joe, You are very creative with this little contest. I was wondering if you really contacted Mr. Buffett about it? Right or wrong I have never really benchmarked my net worth against anything. I casually like to read about the net worth of the average American and see where we fit in, but that’s it. Thank you for writing this up. Interesting and entertaining. Tom

    • retirebyforty January 11, 2018, 11:44 am

      I’ll try to contact Mr. Buffett, but he’s very busy so I don’t know if I’ll hear back.
      Benchmarking is just for fun. As long as your net worth increases, it’s not a big deal. We’re all at a different point in life.

  • sc9182 January 11, 2018, 4:37 am

    Joe:
    You will definitely win with RB40 fund. Can you outdo/outsmart with achieving your own goal, there lies the rub 🙂

    A few things to be careful about ever increasing networth attainment and goals is, a few BAD events could hurt/details those goals: medical conditions, lawsuits (motorists/pedestrians/renters/frivolous), or a possible id-theft or worse yet retirement/brokerage account hack/theft.

    Sufficient umbrella insurance coverage could some of these unfateful events – but not all. Barring such rare events, you guys sure to be on a roll for next decade of excellence with RB40 fund and it’s progress! Rock on!

    • retirebyforty January 11, 2018, 11:45 am

      You’re right about those bad events. Those things tend to happen when you’re older, though. We just have to be vigilant. Thanks!

  • sc9182 January 11, 2018, 4:41 am

    Joe:

    To add to my earlier comment, Warren Buffet in fact had something to say about human capital (which you included in your RB40 fund):

    To young and middle-aged investors, human capital offers inflation protection and is a very important asset that should not be overlooked. … Warren Buffett once said, “The best investment you can make is always in yourself.”

  • Ms. Frugal Asian Finance January 11, 2018, 4:52 am

    Wow this is super cool! I’ve read about the $1M bet on other blogs. It’s so exiting you are joining the game. Either way, I’m rooting for you!

  • Lily | The Frugal Gene January 11, 2018, 4:53 am

    Why do millennials have a higher chance of beating VFINX? Is it earned income?

    I don’t think our family held any observation on how we bench against the market. We should start taking things more seriously. One of us is officially 30 years old now, no more Mr. Young n’ Dumb allowed anymore 🙂

    • retirebyforty January 11, 2018, 11:47 am

      Earned income and higher potential. For older people, a lot of us are already beyond the peak potential. I’m pretty sure I’ll never earn as much as I did when I was 38. Good luck!

  • Mr. Widget @Engineering Cents January 11, 2018, 5:07 am

    I like this challenge. Being a young GenXer with a baby we will be challenged in the coming years with childcare. Hopefully we can keep our income strong to combat this though!

    Good luck Joe!

    • retirebyforty January 11, 2018, 11:47 am

      Childcare is expensive, but it’s only a few years. It should be better once your kid starts school. Good luck!

  • Helen @ Retire Early Helen January 11, 2018, 6:15 am

    Good luck, Joe. Please keep us posted. In terms of investing, the low cost index funds are my friend. I used to invest on some actively managed mutual funds. The performance was okay, but the expense ratio was a little bit high. About 5 years ago, I switched all to the index funds. Partly because of the messages Warren Buffett sent to the public.

    Yesterday, CNBC was saying that, Warrent Buffett is still using his Samsung flip phone. It’s a cool story, and made me laugh.

    • retirebyforty January 11, 2018, 11:49 am

      All of the investments in our retirement accounts are in index funds too. If we lose this bet, I’ll probably move everything to index fund. If you can’t beat them, join them. Warren Buffett’s strategy is a good one.
      Wow, even I got rid of my flip phone years ago. 🙂

  • Max Your Freedom January 11, 2018, 6:23 am

    Our household’s net worth grew by a factor of 12 over the past 10 years, so we definitely beat the index benchmark. It’s doubtful we’ll have that kind of performance over the next 10 years, but I still think we’ll be able to beat the index as long as we’re still working. Once we reach FI in 5 years, it will be much harder to achieve. Good luck, I’m betting on the RB40 household!!

    • retirebyforty January 11, 2018, 11:50 am

      It’s going to be very tough to grow x12 again. There are no more low hanging fruits at this point. You probably can still beat VFINX, though. Good luck!

  • DocG January 11, 2018, 7:07 am

    Hey Joe, I think it’s a good target. I agree, the younger you are the more aggressive. Millennials should be able to blow this one out.

    • retirebyforty January 11, 2018, 11:51 am

      Should be really easy for people in their 20s and early 30s. They’re just coming into their own. Millenials seem to be doing much better over the last few years.

  • Richard G January 11, 2018, 7:40 am

    Yes, the market has been in a bull run and is due for a correction. I still like the index funds for overall growth though. I do have some bond index funds and equities as well though. You should be ready to pounce on the index funds if there is a market crash though. Think it will be the best way to grow your money if you have at least 3-5 years before you need to use the $s. Downturns usually gain back all their value with a year or 2. I still think it is a safe bet to hold a total market index fund until there is a true correction. That’s my take on it. It’s going to be tough to beat unless the timing is just right. Hope you can do it. You might be the next Buffett if you do. GL

    • retirebyforty January 11, 2018, 11:53 am

      I’m planning to add more to the stock market when it crashes. The timing is really tough because you have to get it right twice. However, I have a strategy. I’ll keep 80/20 (stock/bond) allocation this year and move to 70/30 as the market keeps rising. If it crashes, I’ll have plenty of fund to invest. We’ll see if that works.

  • Mr. Tako January 11, 2018, 8:11 am

    I think you stand a chance Joe. Over the last couple years I’ve lived off income from our portfolio and we still managed to beat VFINX. It’s definitely possible.

    One of the main reasons why Buffett won the bet was because he was betting against a “basket” of hedge funds. That doesn’t mean a few of the hedge funds didn’t beat him, it just means “on average” he won.

    • retirebyforty January 11, 2018, 11:54 am

      I think all the hedge funds lost. They just don’t do as well over this extended bull market.

  • Phil Sykora January 11, 2018, 9:13 am

    “Millennials will make huge gains over the next 10 years and should handily beat VFINX.”

    I work as a dishwasher and video store clerk while going to school full-time. Let’s hope you’re right.

    In all seriousness, it’ll be easy for me since I only have to gain a few thousand more dollars. Is the RB40 fund public?

    • retirebyforty January 11, 2018, 11:55 am

      Good luck! I’m sure you’ll do very well over the next 10 years. If you’re reading this site and other blogs, then you already have huge advantage over your peer. Keep at it!
      The RB40 fund is not public, but it’ll be a bad deal anyway. Potential investor will get their investment and any gains back then I’m dead. 😉

  • Nick January 11, 2018, 9:34 am

    I’ve seen different bloggers taking up this challenge and I love it!

    Your twist on it is especially interesting.

    Most people compare their returns, but never their increase in net worth.

    In a lot of aspects, net worth is more important than rate of return. Especially for FIRE seeking folks.

    Thinking I may need to take up this challenge 🙂

    • retirebyforty January 11, 2018, 11:56 am

      You should go for it. It will be tricky over the next few years because the market will be very volatile.
      Good luck!

  • Accidental FIRE January 11, 2018, 4:24 pm

    Ha, good luck Joe. According to Elon Musk I’ll be living on Mars in ten years so hope I have good Wifi there to check your blog and your results 🙂

  • Income Master January 11, 2018, 4:47 pm

    All the best! This will be fun to follow along with.

  • Bob January 11, 2018, 5:20 pm

    You know, I think you are exactly right. Your family and business is really quite similar to a Fund. People are working making money, reinvesting money, collecting dividends, etc. Especially the larger your fund becomes the less your saving will impact your net worth.
    I will be comparing mine also. So far I’m slightly ahead for the last 3 years.
    Good Luck!

    • retirebyforty January 12, 2018, 8:28 am

      It’s good to think of your family finance like a business. We need to keep the cash flow positive and invest. Good luck to you as well. Great job over the last few years.

  • Buy, Hold Long January 11, 2018, 5:24 pm

    Good luck with your bet, I will definitely be watching. It is an interesitng concept isn’t it. In the end the charities benefit from this.

  • Dave @ Married with Money January 12, 2018, 4:55 am

    Haha, I love this. Our net worth is small enough that our contributions are still a considerable portion of our gains, so I think we will beat Buffet for sure. 🙂

  • Ron Cameron January 12, 2018, 9:56 am

    I’ll pit AGTHX against VFINX any day if we’re talking a ten year window. Over the last 40+ years it’s beaten it a vast majority of the time. People may not like active management overall but good active management (though rare) is very hard to beat! Especially now that you can get the fund (and other from American Funds) via no load at Fidelity.

    On a side note about active management: I’ve found it entertaining that recently some bloggers have been thinking they can outwit the market while claiming it’s impossible!

    • retirebyforty January 12, 2018, 10:51 am

      I checked AGTHX and it lost to VFINX over the last 10 years. There were a few big drops. That’s kind of strange. The fees is pretty high at 0.64%.

  • JoeHx January 12, 2018, 10:57 am

    I think I could beat the 500 index with my net worth, too. Sadly, many people won’t as they take on more debt and their net worth will decrease. I guess their only hope in beating the S&P 500 is a huge crash?

  • Dividend Portfolio January 12, 2018, 8:39 pm

    Good luck on the challenge Rb40. I actually started my own challenge this year, which was the 52 week money challenge. It’s not nearly as lofty as yours, but, like you I hope to achieve it. Looking forward to seeing how you do on your challenge.

  • CJ January 13, 2018, 2:15 pm

    Best of luck Joe! I’m putting my own fund against the S&P500 for a pet with a friend.

  • Jason January 13, 2018, 2:36 pm

    I sure do hope I can beat VFINX. Last year my net worth went up 50%. I certainly don’t anticipate that continuing, but 25% a year would be nice. Let’s hope it continues. Interesting challenge and I do think I can do it.

  • Ralph January 14, 2018, 1:18 am

    Joe:
    Do you know which were the five hedge funds chosen?
    Thanks,
    Ralph

    • retirebyforty January 14, 2018, 4:36 pm

      Sorry I don’t know. I think they were all funds of funds type. I couldn’t find the exact funds.

  • Mr. Groovy January 14, 2018, 5:39 pm

    Haha! I’ll beat VFINX easily. Neither Mrs. G nor I are working, but we got a large position in an up-and-coming lithium concern. Keep buying electric cars, Millennials.

  • Al January 15, 2018, 12:09 am

    Yes, Boomer out! Made a career out of people under estimating me so this is going to be a breeze. Why?

    If your retirement income does not require your investments or savings then you have the freedom to be more aggressive in your allocations. As far as 70/30 and that should beat the VFINX over 10 years.

    Times have changed and the economy and markets are less dependent on standard valuations. So corrections are going to be a lot smaller than in the past and faster. You may have a < 5% correction in a day and back. Just my 2 cents.

    • retirebyforty January 15, 2018, 7:24 am

      Good luck! Why would 70/30 beat VFINX? The 30% bond is a big drag on gains over a long period.
      I need to do more research.
      I think you’re wrong about smaller corrections. I believe we’ll see a huge correction in a year or two.

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