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Was looking over estate plans.

Current directive is liquidate everything (including Berkshire!) and put 90% in RSP and 10% in cash equivalents.

The reasoning is that when I'm no longer around the portfolio needs to be hands off, yet expected to grow at a reasonable rate, say 5-7% plus inflation.

I have a general distaste of cap weighting, ruling out S&P 500, etc., etc.

I'd love to do 90% Berkshire, but nobody knows how the company will change and evolve over the next few decades. I want to believe Warren and Charlie built this thing to last forever. But I can't prove that.

Hence, RSP seems like the compromise.

Thoughts?

While value investors don't like the cap weight spx because things will get overvalued, it kind of acts like a momentum fund at times, hence TSLA. Warren has recommended the SPX since 1993 in the annual letters. Even back in the days of the partnership he made mention back then that the Dow index was a worthy competitor, and that is price weighted.

Me personally, I am selling pieces of Berkshire now and reinvesting those proceeds either in a stock I deem to be cheap and good, or the SPX index. If it's good enough for Warren, it is good enough for me.

To me the RSP is a contrived index, its not reality of the world. It sells everything down each quarter to an equal weight, goes counter to Warren's and any long term believer in businesses strategy. Isn't the object to hold great businesses forever? Why sell them down each quarter.

I know Greenblatt has said that the RSP beats the market by 2% per year, but that goes back, I believe to the early 2000's, like everything else starting point matters.

That's my nickels worth of thoughts :)

I think your plan seems very reasonable. My brother is my trustee and my instructions have been to sell other equity positions as the need arises and retain the majority of the large Berkshire position unless he has real concern.

BRK ownership has been a genuine life changer in many ways, so I admit I am biased! If a dominant BRK position has suited Warren and Charlie who have prepared their estate and philanthropy for decades, it suits me but, of course, we all will be watching carefully when the transition to Greg occurs.

why liquidate upon passing?

take advantage of the stepped up basis for your heirs.

why liquidate upon passing?
take advantage of the stepped up basis for your heirs.

Umm, it will get stepped up. The question was about capital allocation.

Was looking over estate plans.
Current directive is liquidate everything (including Berkshire!) and put 90% in RSP and 10% in cash equivalents.

Thoughts?

This would be instructions for when you are gone and/or unable to manage investments? Instructions for whoever is managing the estate investments but has no skill or ability or desire to do active management?

Then:
50% VASGX (Vanguard LifeStrategy Growth Fund) (80/20 fund)
50% VTSAX or VTI ((Vanguard Total Stock Market Index Fund)
Additionally: "When you withdraw money, take it from whichever fund has the highest value". (This moves the portfolio back toward 50/50. But they don't need to understand that, they just need to do that.)

That's a 90/10 asset allocation.

You need "explain it to a young child ... or a golden retriever" level of instructions.
You want something that that an unknowing person can easily justify and that can't really be questioned. I think that RSP & "cash equivalents" are not that.

Those Vanguard funds are well known and well diversified. Nobody can argue that they won't be around forever, or they are too risky, or need to have the mathematical advantages of "equal weight" explained to them.

why liquidate upon passing?
take advantage of the stepped up basis for your heirs.

No, this is what they should do _after_ they get the inheritance. The stepup has already happened.

My instructions to them are to sell everything immediately after they receive them, and put it all in those 2 Vanguard funds.

That sounds like a very sound bit of reasoning.

Have you considered adding perhaps some QQQE into the mix? Nasdaq 100 stocks equally weighted.

The reason I mention it:
The real EPS of RSP has risen on trend at about inflation + 2.96%/year since 1997. (add about 2.0% for real total return at constant valuation multiples)
The real EPS of QQQE rose at about inflation + 7.5%/year. (add about 0.5%/year for real total return at constant valuation multiples)
That is a stupendous difference in value growth rate. Note, this is not saying that high growth firms are better investments. It's a notion based purely on the growth of old fashioned value value based on the growth of old fashioned net earnings.

The earnings growth rate gap may not remain that large, but it is such a large gap that if it wears off gradually over a number of years it's still worth considering.
Plus, if I'm not mistaken, the QQQE is not nearly as far above its historical average valuation level as RSP is these days.

(in both cases, since they are equal weight, I estimated the trend using median earnings yield rather than average earnings yield, as it de-emphasizes the occasional wild outlier)


My only hesitation with RSP (or any other index fund for that matter) is one not often heard: if there are any firms at all that you would not invest in for ethical reasons, index funds are not a viable choice. It is surprisingly easy to do your own index with little more than a single click at many brokers these days--start with the index list and eliminate the odious).


My own current "drop dead manual" advice to my spouse as heir when I croak is X% Berkshire and (1-X)% QQQE.
I might change that from time to time as I think about it more or more information comes in, but that's the notion for now.

FWIW, my post from last June on the subject of the "normal" value of QQQE if it were trading at its historically average valuation multiples.
http://www.datahelper.com/mi/search.phtml?nofool=y...
The "normal price" is expected to have risen by inflation plus around 7% by this June. And again by next June...

Jim

Out of curiosity do you not include EQAL i you equal weighted selections?

Out of curiosity do you not include EQAL i you equal weighted selections?

[First, I suggest you ask our esteemed web site host to change your handle to something other than your email address. Having your email address out there in public is really asking for trouble.]


EQAL probably has returns very similar to RSP so I don't see a big advantage for it.

But it has an oddity: it's not equally weighted. It is equally weighted by 11 sectors, then equally weighted by stock within each sector. So the weight by stock is inversely proportional to the number of stocks in that sector. Why place outsized bets on a company just because it's in a sector with few stocks--is that likely to be a better or worse business to be in? For example, each energy or utility company gets about 4.5 times the weight of each financial or industrial company because the Russell 1000 has few utilities and energy firms, but lots of industrial and financial firms. Maybe that's the result you want, but I'm not sure why.

If I were to weight companies differently based on what sector they're in, I'd probably weight them according to their sector's long run average ROE or long run returns, not how sparsely populated the sector was : )

Jim

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