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

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. After 16 years of investing and saving, he achieved financial independence and retired at 38.

Passive income is the key to early retirement. This year, Joe is investing in commercial real estate with CrowdStreet. They have many projects across the USA so check them out!

Joe also highly recommends Personal Capital for DIY investors. They have many useful tools that will help you reach financial independence.
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56 thoughts on “I’m taking on Warren Buffett’s Million Dollar Bet”

  1. 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.

    Reply
    • 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.

      Reply
  2. 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.

    Reply
  3. 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.

    Reply
  4. 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?

    Reply
  5. 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!

    Reply
  6. 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!

    Reply
  7. 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 🙂

    Reply
  8. “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?

    Reply
    • 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. 😉

      Reply
  9. 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.

    Reply
  10. 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

    Reply
    • 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.

      Reply
  11. 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!!

    Reply
  12. 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.

    Reply
    • 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. 🙂

      Reply
  13. 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 🙂

    Reply
  14. 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.”

    Reply
  15. 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!

    Reply
  16. 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

    Reply
    • 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.

      Reply
  17. 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 ;-).

    Reply
  18. 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.

    Reply
    • 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.

      Reply
  19. 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.

    Reply
  20. 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.

    Reply
    • 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.

      Reply
  21. 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.

    Reply

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