I’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.
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.
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.
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.
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.
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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