Like many curious onlookers of his political campaign for U.S. president, you may wonder exactly how Donald Trump became a billionaire.
But you likely won’t find people wondering how Trump’s net worth would have grown if he simply parked his money in a passively managed index fund like Vanguard 500 Index (VFINX).
If you asked Trump how he amassed his billions, he’d likely say he did it with bold real estate development deals and smart business management. The Donald may also throw in a few lines about how he graduated from the Wharton School of the University of Pennsylvania.
Now imagine Trump in a news conference where a journalist stands up and asks, “Mr. Trump, early in your career, if you had invested your net worth in index funds rather than real estate, do you think you’d have a higher net worth now or a lower net worth?”
After laughing hysterically, Trump would likely dismiss the question as a joke and move on.
But as it turns out, a scenario of Trump’s business acumen being beaten by the passive nature of index funds is not a joke.
How Trump Stacks Up Against Vanguard 500 Index (VFINX)
I recently ran across an interesting Trump story at NationalJournal.com, where they suggest the famous billionaire could have been even richer by “doing nothing.”
Here are some of the key points in the story (taken verbatim):
- While many Trump supporters believe he is a self-made man, it was actually his father, Fred Trump, who built the real-estate empire that Donald Trump took over in 1974.
- If he’d invested the $200 million that Forbes magazine determined he was worth in 1982 into that index fund, it would have grown to more than $8 billion today.
- (That $8 billion) exceeds by billions recent estimates of Trump’s worth by financial publications.
- Coincidentally, there was a self-made businessman who was also worth about $40 million in 1974: Warren Buffett. Had Trump allowed Buffett to manage his fortune, too, Trump might also be worth what Buffett is today: about $67 billion — or about 22 times better than what the stock market would have produced.
Currently, the Forbes net worth for Donald Trump is pegged at $4 billion. That’s half what he could have produced by simply investing in a mutual fund like Vanguard S&P 500 Index.
The Ultimate Active-Management vs. Passive-Management Comparison
When viewed through the lens of investment management style, Donald Trump is an active manager. It’s just that instead of buying, holding and selling individual investment securities, he built the majority of his fortune on actively buying, managing, renovating and selling real estate.
But like many managers in the actively managed world of mutual funds, Trump’s performance has lagged behind the passively managed style of index funds like Vanguard 500 Index in the long run.
With all of Trump’s successes — along with his failures and bankruptcies — he could have been better off sticking his money in Vanguard 500 Index, which was the only index of its kind back in 1982. At that time, Trump could have invested his $200 million net worth and grown it to $8 billion today, far beyond his current estimated net worth.
Index Funds for President (or Presidents for Index Funds)
Hopefully this Trump vs index funds scenario has been insightful, illuminating and entertaining — or at least one of those three. But the story behind the story may be that Donald Trump isn’t exactly the self-made billionaire that the vast majority of his followers believe him to be.
Trump isn’t rich because he’s a smart businessman — he’s rich because his father was rich. In fact, Trump could be richer if not for some of his more questionable investment moves, such as his Atlantic City casinos, or if he had parked his money in index funds like many Americans already do in their IRAs and 401(k)s.
Perhaps Donald Trump isn’t the antithesis of the career politician after all. Like most politicians in office today, maybe he’s just a guy that invested and spent money that he didn’t earn and made a career out of pretending to be smart.
Although we can’t vote for index funds for president, perhaps we can elect a president who invests in index funds?
As of this writing, Kent Thune did not personally hold a position in any of the aforementioned securities, although he holds VFINX for some client accounts. His No. 1 holding is his privately held investment advisory firm in Hilton Head Island, SC. Under no circumstances does this information represent a recommendation to buy or sell securities.
