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The Investment Instructions in My Will Thumbnail

The Investment Instructions in My Will

Advisor Selection Estate Planning Family Insights Investing

These 2-part suggestions are essentially identical to certain instructions I’ve laid out in my will. 

  1. I've advised a simple investment allocation
  2. I've encouraged the use of a financial planner for guidance beyond investment management 

It's what I believe is best for my family's investment assets after I'm gone. 

1) Investment Allocation

Unless you're facing the fiduciary liability that comes with acting as the Trustee of someone else's money (for example, you're the Trustee of your company's retirement plan or of a charitable foundation), you do not need to pay anyone the going rate to manage investment assets for you (currently ~1%). 

If you follow the investment allocation below "I believe your long-term results from this simple policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee asset managers that comprise the majority of the financial advisory profession."1

  1. Keep one to two years of estimated expenses in a cash savings account (the exact amount depends on life circumstances, as we share here).
  2. Put the remainder in one very low-cost global index fund. This fund should comprise 20% in short-term government bonds and 80% in diversified global stocks. I suggest Vanguard’s funds. Currently, an example would be the Vanguard LifeStrategy Growth Fund (VASGX).
  3. The more your yearly spending is under 5% of total investment assets, the more likely the money will last your lifetime.

2) Financial Advice

How to invest assets and maintain a safe spending rate is just the beginning of the financial questions you’ll be facing. 

So, while I strongly discourage you from paying for asset management, I just as strongly encourage you to pay the going rate (currently ~1% in the year 2021) for a financial planner.

The right planner should provide you with a broad range of financial planning and tax advice. These insights should be personalized to what you're facing financially, beyond just the narrow management of your investment assets. If the advisor has the character and judgment that you can grow to trust, then I encourage you to allow them to manage 100% of your investment assets. While asset management alone is not worth paying much for, when combined with caring, competent financial guidance, broadly applied over time, it can be worth many times the going rate.  

I suggest seeking additional financial advice from a financial planner:

  1. that does not charge commissions (known as a Fee-Only advisor, not a Fee-Based advisor)
  2. that holds the CFP® designation
  3. that responds positively to the broad investment allocation suggested above

Currently, examples can be found at the National Association of Personal Financial Advisors (NAPFA.org), XYPlanningNetwork.com, or the Alliance of Comprehensive Planners (acplanners.org). 

Perfect is the enemy of good

Rather than seeking perfection, these suggestions try to avoid major issues and maintain a very high probability of a great outcome. 

One of the biggest and most obvious limitations here is that no additional information can be communicated after my death. Yet, if these suggestions are too long or too complex, they might be abandoned (even by a legal trustee or a loved one). After all, they are suggestions, not legal directives. 

Simple vs. Complex

The suggestions are simple enough for anyone to follow, regardless of their financial background.

Too much complexity leads to confusion and the potential for errors. This potential only increases during dark times. 

Actionable vs. 100% Complete

The suggestions are actionable rather than fully exhaustive and complete.

A full and complete answer might be too much information. It might require too much effort and lead to procrastination. Inaction is likely as harmful as making a major mistake. 

Team vs. Solo 

The suggestions assumed that my heirs will already have an estate planner and an accountant. There are gaps in these suggestions that other financial professionals can fill in for my heirs. 

These suggestions are written to avoid mistakes, as well as to avoid bad actors in the financial advisory profession. Estate attorneys and certified public accountants have a long history of upholding a fiduciary duty to their clients. The fiduciary duty of your average financial advisor, while well-marketed, still has a murky definition. You can read our additional thoughts on this topic here. I don't want my family to fall victim to clever marketing with so much on the line. 


Your Family's Personalized Adjustments

Since the suggestions are not stated as the single optimal solution - i.e., the most complex and 100% complete - these limitations might lead other families to make personalized adjustments. A few common considerations are included below.

  • You might consider a different investment split (rather than 80% and 20%). 

    • Your investment split depends on your personality regarding future uncertainty (most often called your "risk tolerance"). Your investment split can also depend on your need and your ability to accept uncertainty. But be careful! A portion to stocks lower than 60% can actually increase your risk since bonds don’t typically generate enough to support retirees if they reach an advanced age. You also might consider holding less than two years in cash, especially if you're still early in your career and therefore saving and building your own nest egg, or if you choose an allocation to stocks lower than 80%. 

  • You might consider additional evidence-based investment factors (beyond those suggested above).

    • By considering the suggestions above, you'll be implementing an effective investment approach with efficient, low-cost, and high-quality solutions. Your investments will also be structured according to decades of robust evidence on how to capture long-term market growth. However, you might be giving up the chance for additional expected return by failing to pursue other evidence-based investment factors. For example, I've found that Vanguard tends to concentrate its holdings in larger US businesses. You might consider the expected benefits of adding more non-US (international) businesses and real estate (in the form of diversified real estate investment trusts). You might also consider favoring smaller, out-of-favor businesses (called "small-value" businesses) a bit more than larger established businesses (called "growth" businesses). 

  • You might consider a slightly different investment allocation in a retirement account versus the non-retirement account referenced above. 

    • You may end up paying more in taxes than needed by keeping a similar investment allocation in all investment accounts. The example of a Vanguard LifeStrategy fund was suggested in pursuit of simplicity, and while it should work well in all account types, it's expected to work best specifically in a non-retirement account. A life-cycle-style of fund is likely more appropriate in a retirement account. For example, a Vanguard Target Retirement-style fund.

  • You might consider a lower withdrawal rate, somewhere between 2% and 4%.

    • Your rate depends on the investment split discussed above, and on how many years you plan to draw on your assets. The longer you expect to live, the lower your starting withdrawal rate should be. But be careful! The average American will live longer than they usually think. Consider the Social Security Administration's life tables, and focus on life expectancy for those that make it to an advanced age.


Warren Buffet's Instructions for His Wife's Inheritance

Much of this article's thinking was inspired by a line or two written by Warren Buffett on the investment management of his wife's assets after his death:

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 suggest Vanguard’s.) 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 1.

Buffett does not mention rebalancing to these investment splits nor of an appropriate rate of spending from them. Buffett's suggestions are also more concentrated in their allocation to stocks (90% rather than 80%) and by investing only in American businesses (rather than globally).

Although Warren Buffett is widely credited as one of the best investors of all time, he encourages a much different investment approach for his family (and the public).

...both individuals and institutions will constantly be urged to be active by those who profit from giving advice or effecting transactions. The resulting frictional costs can be huge and, for investors in aggregate, devoid of benefit. So ignore the chatter, keep your costs minimal, and invest in stocks as you would in a farm... to accumulate shares over a long period and never to sell when the news is bad and [prices] are well off their highs1. 

You can read more here on pages 19 and 20 of his annual letter to his company's shareholders:

1 https://www.berkshirehathaway.com/letters/2013ltr.pdf