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Investing my retirement money in Berkshire Hathaway shares is the right option ?


I have the greatest respect for Berkshire Hathaway chairman and CEO Warren Buffett. I admire him not just for his stellar investing record -- Berkshire shares have gained 21.6% annually from 1965 through 2014 versus 9.9% for the Standard & Poor's 500 -- but also for the folksy wisdom he imparts about business, investing and life in his annual letters to shareholders.

So I have no problem with you owning Berkshire( BRKB) shares (most likely the B shares, which recently sold for $144 a share, or roughly 1,500th of the value of the A shares, which recently traded for $217,118).

Indeed, many years ago I invested a small amount in Berkshire shares that I later sold for a tidy profit (and I've chided myself ever since for not hanging onto them longer).

That said, I don't think it's a good idea to invest too much of your retirement savings into Berkshire. As a rule, it's not wise to concentrate more than 10% or so of your stock holdings in the shares of any single company. Assuming you have an otherwise well-diversified portfolio , I suppose you could make a case for pushing that percentage to 20% or so for a unique company like Berkshire Hathaway. But I wouldn't go beyond that.

Why? Two reasons.

First, when you buy shares of Berkshire Hathaway, you are not only getting a huge portfolio of securities, but 59 operating businesses as well -- everything from a brick maker to a railroad. You're also buying Buffett's skill in overseeing those holdings and acquiring new ones.


If you're going to make any single investment the cornerstone of your stock holdings, that investment ought to be very broadly diversified . Ideally, I think it should track the overall U.S. stock market. It doesn't have to mirror the market exactly, but it's weightings in small-, mid- and large-cap holdings, growth and value shares and different industries and sectors should generally adhere to those of the market overall.

That's why a total stock market index fund or an ETF is an excellent core holding for individual investors. You get virtually all publicly traded U.S. stocks in one fund, and you get them in the exact proportion each represents of the market's total value.

Berkshire Hathaway certainly has a wide range of holdings. Buffett describes the company as possessing "an unmatched collection of businesses" and "an extraordinary diversity of earnings, premier financial strength and oceans of liquidity." But, for better or worse, it doesn't have the breadth of a total stock market index fund.

For example, just four stocks -- Wells Fargo (WFC) , Coca-Cola (KO), American Express (AXP) and IBM (IBM) -- account for roughly 60% of the company's investment portfolio. As for its operating companies, they tend toward cyclical businesses (manufacturers, retailers, a railroad), as well as finance and insurance operations.

Don't get me wrong. Buffett has been incredibly successful at growing his shareholders' capital in a prudent manner, in particular by identifying companies that have a special niche that allows them to generate consistent profits. But owning Berkshire doesn't give you the same broad exposure to the overall economy and the market as you get from a total stock index fund or ETF.

The other reason I don't recommend investing all or most of your retirement savings in Berkshire is that it's unclear how much longer Buffett, at age 84, will remain at the helm of Berkshire.

Published by Sonal