When the Dow Jones Industrial Average surged about 1,100 points on Monday, it offered a live test of Buffett’s 2008 rule for a 66-year-old retiree who had almost moved $600,000 to cash the Friday before. The rule, written by Warren Buffett in October 2008, holds that markets recover before the economy or sentiment does—so waiting for clear signals can mean missing the rebound.
The near-miss order
The couple, ages 66 and 63, hold $1.8 million across a rollover IRA, a brokerage account and a Roth. Their stock sleeve—65% in an S&P 500 index fund—was worth $1,239,695 at the index’s Oct. 6 record, fell $53,799 on Thursday, and closed Friday at $1,170,000. After a week of alarming headlines, the husband typed an order to shift $600,000 of that fund into a money market fund until things settled. He did not send it.
Monday’s rally would have made that order costly right away: the $600,000 would have missed $14,158 of the day’s gain. The broader stock sleeve rose $27,607 on Monday to $1,197,607, still $42,087 below its record.
What the rule cost first
Buffett published his rule on Oct. 17, 2008, in a piece titled “Buy American. I Am.” He was explicit that he could not predict short-term market moves, and the months that followed proved the point. The S&P 500 fund fell another 26.9% over the next five months, bottoming on March 9, 2009.
Then the recovery arrived before the all-clear. The recession ended in June 2009, but the National Bureau of Economic Research did not announce it until Sept. 20, 2010. By that announcement, the fund had climbed 67.7% from its low. Five years after Buffett’s piece, it was up 85.8%. A $100,000 investment held since then would be worth $807,467, versus $129,634 in three-month Treasury bills.
The rule’s logic appears in the clustering of extreme days. Of the S&P 500 fund’s 20 best days since 2000, 12 occurred within 10 trading days of one of its 20 worst. Missing the 20 best days would have turned a $100,000 investment from Jan. 3, 2000, into $131,516 by Monday—less than the $169,619 that Treasury bills returned over the same period.
A different number to decide by
Buffett’s rule describes the timing of recoveries, not a guarantee that any single day marks a bottom. The S&P 500 fund remains 3.4% below its record, and the Nasdaq-100 fund is 10.6% below its own. For retirees drawing $60,400 a year from the portfolio, the more relevant figure is the 10.4 years of withdrawals covered by their $630,000 in bonds and cash.
That reserve means no stock has to be sold in a bad year—the very protection the Friday order sought, but at the cost of missing Monday’s gain. If the real concern is the 65% stock allocation, the couple can adjust it once inside the IRA, where the change carries no tax cost, and choose the day based on their plan rather than on the Dow’s daily moves.
The Dow’s 1,100-point jump came while last week’s worries remained unresolved, which is precisely the scenario Buffett’s rule addresses. The market moved first; the news had not caught up. For this couple, the number that mattered on Friday night—10.4 years of covered draws—was unchanged by Monday’s rally.