The Financial Post published just such an article by financial planner Jason Heath. Heath points out the most fundamental and important lesson that Buffett has lived by all his life - spend less than you earn. The fact that Buffett is a billionaire doesn't deny the principle. It's true that he has piles of cash (or easily could have, by cashing his investments) to spend but he could fritter it away. If your income goes up but your spending rises just as fast you will be no further ahead.
Let's build on Heath's article and draw a few further lessons from Buffett's disease.
- Disruptive health problems do happen - Illness and disease become more likely with advancing age and should not be surprising. Buffett is fortunate as he says that his cancer does not diminish his capacity to manage Berkshire Hathaway. Of course, it's not just the old that may be affected; bad health may hit at any age. We should not kid ourselves or pretend it cannot happen to us. It's wise to be prepared.
- Have a backup person for managing investments - Some diseases like stroke or Alzheimer's may leave the investor permanently unable to carry on while others like cancer may be too debilitating during treatment. Does your husband, wife or partner know how you manage your investments and have the ability to step in? Or could a brother, sister, cousin, parent or friend do it? Perhaps a professional is a better option. The Power of Attorney (POA) is the legal document that allows the replacement person to make trades, move money etc. Contrary to what some people may believe, a spouse or child cannot automatically step in to act. The BMO Retirement Institute gives excellent pointers about the ins and outs of Power of Attorney in Financial Decision-making: Who Will Manage Your Money When You Can't?
- Write down and file investing documents - It's good to talk to the person chosen to be the backup about your investment strategy but it's even better to write it down in a Investment Policy Statement. Prepare a list of accounts and brokers or banks that you deal with and keep the statements filed in a place they can be found. It avoids frustration and time lost looking for your backup person, not to mention possible missed actions or penalties (e.g. something forgotten in a tax filing). For online account access, write down the access ID and password (keeping in mind that the backup person still needs to have a POA to act legally in making transactions). If the information is all on your computer, make sure the person has the password and add to the written list the filenames with critical data e.g. tracking adjusted cost base for ETFs in a taxable account.
- Build a portfolio with some cash or equivalent holdings - Health problems may interrupt employment income and may also occasion extra expenses. Avoid adding financial worry to the health concern by having cash readily available. Various types of insurance like disability, critical illness and long term care can play a role. The investment portfolio can help as well by holding contingency funds in the form of stable short-term easily cashable investments like T-bills, money market funds, high-interest savings deposits or just cash. Tax-exempt TFSA accounts are often used to hold such funds.
- Automate and simplify the portfolio - If your portfolio can more or less tick along on its own, there is less worry for you, less chance things will go wrong and less work for the backup person. Automation can be accomplished for those in asset building mode by telling your broker to initiate a dividend reinvestment program for any eligible ETFs (Money Smarts blog runs through broker offerings here) or stocks (Canadian Dividend Reinvestment Plans blog has a list here). For those in a retirement income-receiving mode, automation might be accomplished through selecting securities that produce income, as we previously blogged about in Generating Cash: Income from Securities with the High-Yield Couch Portfolio. Simplification is achievable by fewer holdings in a portfolio. Solid balanced portfolios can be built with a handful of ETFs - in Simple Portfolios Compared we looked at portfolios with no more than six holdings. At an extreme, a single balanced fund may do a very good job as we explained in One-Stop Investing for Your RRSP Contribution.
- Give some of it away - Once you reach a point of having more than enough for your own needs, consider giving some of the surplus away, as Buffett to his credit has already being doing. That can be through planned giving after death, accomplished by means of a will, which everyone should have anyway. Or it can be done at any time while living, when one can derive the pleasure of seeing the donation put to use. The investor could, for example, make a Registered Education Savings Plan contribution for a family member in the next generation, allowing the money invested to grow tax-free when used for higher education. Giving securities instead of cash to a registered charity can avoid any capital gains tax as TaxTips.ca explains, as well as gaining a tax credit for the donation.
Disclaimer: this post is my opinion only and should not be construed as investment advice. Readers should be aware that the above comparisons are not an investment recommendation. They rest on other sources, whose accuracy is not guaranteed and the article may not interpret such results correctly. Do your homework before making any decisions and consider consulting a professional advisor.