In 2007, Berkshire Hathaway chairman Warren Buffett, who is widely considered to be one of history’s most successful investors, issued a challenge to Wall Street’s largest and most sophisticated money managers. He wagered that over the next ten years, a low-cost, passive index fund, arguably one of the simplest investment products on the market, would outperform any group of hedge funds, which typically employ the brightest money managers and are comprised of the most complex trading strategies. Buffett believes one of the best investment strategies relies on keeping it simple.
His thesis was as simple as his investment strategy: the highly complex hedge fund strategies would not be able to overcome the burden of their elevated fees, and the high-activity strategies would succumb to the buy-and-hold approach of the index fund. In the end, Buffett was more than validated, as his S&P 500 index fund averaged an 8.5% annual return from 2008-2017, with the competing hedge funds averaging a mere 3% return over the same period.
These results should not be taken to mean that hedge funds can never outperform a stock market index. Indeed, hedge funds can often play a valuable role in a diversified portfolio for the right investor. That said, at Archetype we preach simplicity over complexity when it comes to wealth management. Rather than follow the daily musings of market prognosticators or trade based on the countless number of market indicators, we choose to let our evidence-based Three Dials philosophy guide our asset allocation decisions. We tend to favor low-cost index funds when they are available over higher priced active managers. We have a transparent explanation for every investment decision we make, rather than hiding behind the mysterious shroud of a “black box” investment scheme.
Some of you may be familiar with the acronym KISS, which at Archetype means “Keep It Simple, Steward”. As Buffet proved, simplicity does not mean sacrificing excellence. Indeed, at Archetype we strive to deliver excellence in all aspects of our clients’ lives, from the simple to the complex. Ultimately, our mission is to help clients simplify their financial picture, form a plan to attain their goals, and be free to pursue their passions in life!
At Archetype, we have a set of twelve principles designed to help families thrive across generations. Check out more blogs from our "Thriving Family Principles" series.
https://www.berkshirehathaway.com/letters/2017ltr.pdf