Weekend Reading: Buffett’s Annual Letter Edition

Warren Buffett’s much anticipated annual letter to shareholders was released this weekend. As always, Buffett shared some great nuggets of wisdom to Berkshire shareholders while setting the stage for his eventual replacement (down to two long-time Berkshire employees, Ajit Jain and Greg Abel).

Highlights from Buffett’s annual letter include:

Another market-beating year where Berkshire grew by 21.9 percent compared to the S&P 500’s 21.8 percent. Berkshire’s compounded annual gain between 1965-2017 is 20.9 percent while the S&P 500 delivered 9.9 percent over that time.

Berkshire’s net worth grew by $65 billion in 2017, but nearly half of that came as a result of U.S. Congress rewriting the tax code in December.

Buffett and Charlie Munger, who together manage Berkshire’s investments and acquisitions, failed to find any new stand-alone businesses to acquire as the valuations of companies they reviewed proved to be too high for their liking. They did make one large investment – a 38.6 percent partnership interest in Pilot Flying J.

This lack of acquisition activity means Berkshire is sitting on a whopping $116 billion in cash and treasury bills.

“This extraordinary liquidity earns only a pittance and is far beyond the level Charlie and I wish Berkshire to have. Our smiles will broaden when we have redeployed Berkshire’s excess funds into more productive assets.”

Buffett spends a few pages discussing his famous 10-year bet with Protege Partners. An interesting note is that Buffett and Protege each funded the bet by purchasing $500,000 strip bonds. Five years into the bet, the bonds were selling for 95.7 percent of their face value with an annual yield to maturity of 0.88 percent.

Buffett and Protege agreed to sell the bonds and purchase Berkshire ‘B’ shares. The result is that Girls Inc. of Omaha – Buffett’s charity of choice – received $2.22 million instead of the $1 million it was expecting.

In a nod to Stocks for the Long Run, Buffett goes on to explain that bonds are actually riskier than stocks over the very long-term.

You can read the full letter here.

Finally, Buffett has some advice for those who are interested in making the annual pilgrimage to Omaha for Berkshire’s AGM. Fly into Kansas City and drive in to Omaha:

“Keep in mind that most airlines substantially increase prices for the Berkshire weekend. If you are coming from far away, compare the cost of flying to Kansas City vs. Omaha. The drive between the two cities is about 2 1⁄2 hours, and it may be that Kansas City can save you significant money. The savings for a couple could run to $1,000 or more. Spend that money with us.”

Weekend Reading: Buffett's Annual Letter Edition

This Week’s Recap:

Many thanks to Rob Carrick for highlighting Marie’s post on how retirees can make good use of TFSAs in his most recent Carrick on Money newsletter.

On Monday I wrote about life insurance and how older Canadians can avoid getting screwed.

On Wednesday Marie asked if fear is keeping young investors out of the stock market.

And on Friday I looked at Nest Wealth’s capped monthly fee investment structure, which is ideal for investors with large portfolios.

Over on Rewards Cards Canada I shared three things that are missing from credit card comparison sites when it comes to presenting you with the best card.

Weekend Reading:

One of the best story tellers in the industry, Millionaire Teacher Andrew Hallam asks why you would fire a god-like investment manager who averaged returns of 29 percent a year.

Canadian Couch Potato author Dan Bortolotti says the humble GIC deserves a place alongside bonds in any balanced portfolio.

A group of Harvard alumni proposed a solution for how the university’s endowment can pay for a new tax on investment income and boost returns: don’t think so much.

The Irrelevant Investor Michael Batnick talks about seeing your blind spots when it comes to investing.

Boomers love to pick on Millennials about their spending choices but behavioural economist Dan Ariely is here to squash the generational wars:

“The brain doesn’t change because we’re in a different year. It’s kind of a funny thing to even think about this. But there are some interesting differences with different generations, but I don’t think they’re about the individuals, I think they’re about opportunities.”

Can you trust your retirement savings to a robot? Jon Chevreau says robo advisors offer the best of both worlds in terms of reasonable fees and professional investment management.

Here’s the average length of retirement. Will your money last that long?

The Competition Bureau reached an agreement with Leon’s and The Brick over allegations of deceptive marketing practices over the retailers’ ‘buy now, pay later’ promotions.

Full CPP benefits are tough to reach, according to Rob Carrick. Just 6 percent of recipients receive the maximum and the average payout is about $7,700/year, which is 56.6 percent of the maximum.

Canadians can’t stop using their homes as piggy banks as line of credit debt jumps to a record $230 billion.

Jason Heath says to consider a formal trust, among other options for giving money to your grandchildren.

Finally, an always useful breakdown of expenses from Million Dollar Journey Blogger Frugal Trader and his family of four.

Have a great weekend, everyone!

A Robo Investing Solution For Affluent Investors

Robo-advisors have been around for several years now in Canada offering affordable online investing services with a light human touch.

You might picture the typical client as a smart young millennial just beginning his or her investing journey. After all, that’s how robo-advisors are often portrayed in the media.

But it might surprise you to learn that the average client at one of Canada’s leading robo-advisors is 48 years old and has $170,000 invested with them.

Why Nest Wealth Is A Clear Winner for Affluent Investors

Nest Wealth: A Robo Investing Solution For Affluent Investors

Nest Wealth operates a different business model than the other robo-advisors in Canada. Rather than charging the industry standard “percentage of assets”, Nest Wealth charges a monthly fee that’s capped at $80/month.

So whether you’re an investor with a $200,000 portfolio or $2,000,000 portfolio you’ll never pay more than $960/year in management fees at Nest Wealth.

Boomer & Echo readers can try Nest Wealth free for three months

Other robo-advisors charge a percentage between 0.35 and 0.50 percent, which is great for smaller accounts and a fantastic alternative to expensive bank-managed portfolios that can easily charge 2 percent or more (check your year-end statements, folks).

But once your portfolio crosses a certain threshold – say $250,000 – Nest Wealth’s monthly fee structure really starts to shine.

  • A $250,000 portfolio at 0.40 percent will cost you $1,000/year in management fees. That exceeds Nest Wealth’s monthly caps by $40/year and the advantage only grows from there.
  • A $500,000 portfolio at 0.40 percent will cost you $2,000/year in management fees. With Nest Wealth you’d still pay $960/year.
  • At $1,000,000 the comparison gets pretty ridiculous. You’d pay $4,000 under the percentage of assets model and – surprise, surprise – just $960 under Nest Wealth’s capped monthly fee model.

That’s an absurdly cheap 0.10 percent for Nest Wealth to monitor and rebalance your portfolio.

Adding up the fees

Of course, robo-advisor clients do pay other charges in addition to a management fee. The biggest expense is the MER of the underlying ETFs that make up your portfolio.

Most robo-advisors follow modern portfolio theory and the idea that a low cost, broadly diversified portfolio of ETFs leads to the best outcomes for investors.

This philosophy keeps fees low for investors and ensures your overall cost to invest stays well below 1 percent.

Nest Wealth constructs its portfolios using seven ETFs representing seven different asset classes, with MERs ranging from 0.05 to 0.39 percent. A typical portfolio will cost investors an additional 0.13 percent on top of the flat monthly fee.

Nest Wealth ETFs

  • Vanguard Canadian Short-Term Bond Index ETF (VSB)
  • BMO Aggregate Bond Index ETF (ZAG)
  • iShares Canadian Real Return Bond Index ETF (XRB)
  • iShares Core S&P/TSX Capped Composite Index ETF (XIC)
  • iShares Core S&P 500 Index ETF (CAD-Hedged) (XSP)
  • iShares MSCI EAFE ETF (IEFA)
  • Vanguard REIT ETF (VNQ)

Finally, Nest Wealth also charges $9.99 per trade whenever it allocates or rebalances your account – however these fees are capped at $100/year per account.

It’s an extra charge that other robo-advisors don’t levy onto their clients, but one that’s acceptable when you consider the incredible savings that Nest Wealth offers on portfolios greater than $250,000.

When you consider the management fee, MER of the underlying funds, and $100/year in trading fees, a Nest Wealth client with a portfolio of $250,000 will pay approximately $1,385/year or 0.55 percent.

At $500,000 the annual cost reaches $1,710 or 0.34 percent.

And at $1,000,000 an investor would pay $2,360 per year or just 0.24 percent.

NW_Accounts

The Robo Solution

So here’s the bottom line. Nest Wealth blows away other robo-advisors when it comes to portfolios of $250,000 or more.

If you’ve even considered moving your money over to a robo-advisor, and your portfolio is in that range or higher, Nest Wealth is the clear winner with the absolute lowest fees.

And, well, if your sizeable portfolio is currently being managed by a bank advisor or investment firm that charges 1.5 to 2.5 percent then I invite you to do the math on how much you’d save by switching to Nest Wealth.

In fact, you can send me your portfolio details and I’ll do the math for you.

Final thoughts

Robo-advisors are not the panacea for all investors. Some investors are perfectly happy, willing, and able to invest on their own – and in some cases can put together an even cheaper portfolio than the robos offer. That’s great.

But many investors do need a bit of handholding when it comes to their investments. Unfortunately the full service advisory model fails investors whenever an advisor positions himself as an expert stock or fund picker instead of a rational asset allocator and trusted financial planner.

A robo-advisor strips out all the excess fees that investors used to pay for a “skilled fund manager” and builds a cheaper and more efficient portfolio that will ultimately lead to better outcomes for investors.

Are you willing to give a robo-advisor a try?

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