Warren Buffett is undoubtedly the greatest investor of all time.
Thankfully, despite him being very reserved and largely keeping life to himself, he has laid out many different pieces of advice over the years for the average investor.
To me, the majority of federal employees invested in the TSP would be characterized as “average investors.”
They have some knowledge on their investments, but not too much, and frankly, don’t care to know more. Even though this is true, they do want to make sure their investments perform and provide a stable income for retirement.
Reading through Berkshire Hathaway’s (Warren Buffett’s Company) Letters to Shareholders, I believe I have determined how Warren Buffett would advise the average TSP investor.
I’m a BIG Warren Buffett Fan.
I own and have read nearly all of his Annual Shareholder Letters.
I’ve watched nearly every documentary every produced on him.
I’ve read the books he’s recommended and said inspired his current philosophies on investing.
I have the same “Invest Like a Champion Today” sign hanging up in my office. 😎
Does this make me an expert on everything Warren Buffett? No, but I do feel I have a firm grasp on his philosophies and what he would recommend for the typical TPS investor.
Why You Should Listen to Warren Buffett
One of the questions that need first to be asked before taking someone’s advice is, “why should I listen to them?”
Many people are spewing out information today, but few imparting real knowledge. Warren Buffett, in my opinion, is one of those few.
Warren Buffet’s company Berkshire Hathaway wholly owns Dairy Queen, Fruit of the Loom, Geico, and others. He also has significant minority positions in Mars, American Express, and Coca-Cola Company.
Currently listed as 4th on the Fortune 500, Warren Buffett is the only person ever to build a business from scratch in his lifetime and be in the top 10 of the Fortune 500.
He also has the most consistent investing track record of anyone, ALL TIME.
This chart compares investors with the S&P 500 over time. As you can see, Buffett has the best longevity.
If that doesn’t convince you that Buffett is a man worth listening to regarding investments, I don’t know what will.
What are Warren Buffett’s Recommendations for Investors?
As I’ve said, Warren has written quite extensively on all investing and has never charged for it.
In fact, despite his tremendous amount of knowledge, he’s never written a published book. All of the information we have from him come either in the form of interviews or in the letters he’s written to shareholders of Berkshire Hathaway.
I will say, though, that this is more than enough for us to get an idea of how to invest in the TSP.
Here is what Buffett wrote in 2013 to his Shareholders on how index funds can be a great place for the average investor:
“Most investors, of course, have not made the study of business prospects a priority in their lives. If wise, they will conclude that they do not know enough about specific businesses to predict their future earning power…I have good news for these non-professionals: The typical investor doesn’t need this skill…In the 20th Century, the Dow Jones Industrials index advanced from 66 to 11,497, paying a rising stream of dividends to boot. The 21st Century will witness further gains, almost certain to be substantial. The goal of the non-professional should not be to pick winners…but should rather be to own a cross-section of businesses that in aggregate are bound to do well. A low-cost S&P 500 index fund will achieve this goal.”
The non-professional investor is virtually every federal employee.
I know, I know some of you understand how to invest and would consider yourselves “professionals,” but I’d say that’s a very, very small minority.
Buffett goes on even more in the letter to discuss how he’s advised the trustee’s of his estate to invest his remaining money that will be left to his family:
“My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund…I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers.”
Well, that’s about as simple a suggestion as he could make.
Thankfully, very recently Warren addressed the topic again in his 2016 Letter to Shareholders:
“Both large and small investors should stick with low-cost index funds.”
“If a statue is ever erected to honor the person who has done the most for American investors, the hands down choice should be Jack Bogle. For decades, Jack has urged investors to invest in ultra-low-cost index funds.”
Jack Bogle is the founder of Vanguard Funds.
“Over the years, I’ve often been asked for investment advice, and in the process of answering, I’ve learned a good deal about human behavior. My regular recommendation has been a low-cost S&P 500 index fund. To their credit, my friends who possess only modest means have usually followed my suggestion.”
How Does This Advice Apply to TSP Investors?
Warren Buffett has long stated that a low-cost S&P 500 index fund is one of the best ways for the average investor to save for retirement.
But, for the TSP investor who only has five funds to invest in plus the L-Funds, which are merely a compilation of the five, how do you invest in the TSP in accordance with Warren Buffett’s Guidance.
Enter the C Fund…
If you haven’t yet, you need to check out my Ultimate Guide to the C-Fund.
The C-Fund is one of the cheapest S&P 500 Index Funds in the world.
For 2016, the expense ratio for the C-Fund was .038%.
That means that for every $1,000 invested, you pay just $.38. If you’d like to read more about the fees in the TSP check out my article specifically for 2016 here and for TSP fees in general, this article is pretty popular.
To put that in comparison, a company that Buffett has suggested looking at as a good example of a cheap S&P 500 Index Fund is Vanguard.
Vanguard charges .16% for its Vanguard 500 Index Fund Investor Shares. That is very cheap, but still not even close to what the TSP currently costs (although that could eventually change.)
So, looking at Warren’s statements, I think the C-Fund could easily be substituted. Like so (my additions in bold):
“The goal of the non-professional should not be to pick winners…but should rather be to own a cross-section of businesses that in aggregate are bound to do well. A low-cost S&P 500 index fund (The TSP C-Fund) will achieve this goal.”
Buffett has also stated that his trustees should only put 90% in low-cost S&P 500 Index Fund and the rest in short-term government bonds.
Well, TSP investors are in luck.
The Thrift Savings Plan has one of the most unique funds in the world.
Yes, the fund that many either have 100% of their money in or none at all is, in my opinion, one of the most unique funds in the world.
The reason is rather simple. The G-Fund operates like a long-term bond fund in its returns but can be traded like a short-term fund with no excessive duration.
Therefore, when Warren Buffett is giving advice to his trustee:
“Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund…”
The average TSP investor could look at it as the equivalent of saying this:
“Put 10% of the cash in the G-Fund and 90% in the C-Fund.”
The secrets out… Warren Buffett’s advice for TSP investors has finally materialized. 😉
Should Every TSP Investor Follow Buffett’s Advice?
Although I’ve stated that I’m a big fan of Buffett, that doesn’t mean I believe his instruction is for EVERY single investor.
There are simply too many factors that go into choosing an investment.
A person who stays up at night worrying how their investments are performing isn’t likely suited for something as volatile as the C-Fund.
The same goes for someone who is heading into retirement and plans to begin withdrawals and HAS to have the money to survive. A correction in the market like what happened in 2008 could absolutely decimate their dreams of retirement.
So, although I greatly respect Buffett, take any blanket statement with a grain of salt. Especially those that are thrown at such a large audience as the American investing public.
The fact that Warren Buffett would address the questions of the general investing public is pretty cool.
It’s even more awesome that the small audience (relatively) of federal employees can benefit from this advice is in their retirement plan.
In the large scheme of things, however, it needs to be stated that less emphasis should be put on how to invest, and more on the WHY of investing. This is why so much of my content is directed towards educating federal employees on the importance of the TSP in their overall retirement.
If you haven’t yet, you need to check out what I believe is the Biggest Federal Employee Retirement Mistake. It may surprise you.
– Cooper Mitchell