The Warren Buffett Portfolio is one of the most popular and proven investing strategies for regular investors. With just two low-cost index funds, it provides a straightforward way to build wealth over time. This simple yet powerful approach comes directly from Warren Buffett, one of the greatest investors ever. He recommends putting 90% of your money in an S&P 500 index fund and 10% in short-term Treasury bills.
This two-fund portfolio can help the average investor get market-beating returns without picking individual stocks or timing the market. As Warren Buffett advised in his 2013 letter to Berkshire Hathaway shareholders, low-cost index funds are the best way for most people to participate in the growth of American business. The Warren Buffett Portfolio gives you diversified exposure to stocks while limiting risk and taxes.
In this article, we’ll examine the details of constructing the Warren Buffett Portfolio, look back at its historical performance, discuss how it could work in retirement, and explain how to set it up yourself. With just a few broad stock and bond index funds, you, too can harness the wisdom of Warren Buffett’s highly effective yet simple investing strategy.
Here is an excerpt from Warren Buffett’s 2013 letter to Berkshire Hathaway’s shareholders explaining his two-index fund portfolio theory:
“That’s the “what” of investing for the non-professional. The “when” is also important. The main danger is that the timid or beginning investor will enter the market at a time of extreme exuberance and then become disillusioned when paper losses occur. (Remember the late Barton Biggs’ observation: “A bull market is like sex. It feels best just before it ends.”) The antidote to that kind of mistiming is for an investor to accumulate shares over a long period and never to sell when the news is bad and stocks are well off their highs. Following those rules, the “know-nothing” investor who both diversifies and keeps his costs minimal is virtually certain to get satisfactory results. Indeed, the unsophisticated investor who is realistic about his shortcomings is likely to obtain better longterm results than the knowledgeable professional who is blind to even a single weakness.”
“My money, I should add, is where my mouth is: What I advise here is essentially identical to certain instructions I’ve laid out in my will. One bequest provides that cash will be delivered to a trustee for my wife’s benefit. (I have to use cash for individual bequests, because all of my Berkshire shares will be fully distributed to certain philanthropic organizations over the ten years following the closing of my estate.) My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions, or individuals – who employ high-fee managers.”
What is the Warren Buffett Portfolio?
The Warren Buffett Portfolio refers to a simple two-fund portfolio that legendary investor Warren Buffett recommended in his above 2013 letter to Berkshire Hathaway shareholders. Buffett suggested that the average investor does not need to pick individual stocks or time the market but should invest in low-cost index funds for the long run.
Specifically, Buffett advised putting 90% of the money in an S&P 500 index fund and 10% in short-term US Treasury bills. He did not specify exact funds but said Vanguard would be a good choice. The idea is to get broad exposure to the stock market while also having a small cushion of stability from bonds.
Buffett believes this simple portfolio could outperform many actively managed portfolios from hedge funds and pension funds that charge high fees. The key is keeping costs low and taking a long-term view rather than trying to time the market or pick individual stocks.
This approach reflects Buffett’s investing philosophy of buying diversified “stakes” in American businesses and holding them long-term. While Buffett picks individual stocks for Berkshire Hathaway, he believes most investors are better off with low-cost broad-market index funds.
Performance of the Warren Buffett Portfolio
Historically, the Warren Buffett Portfolio has performed very well compared to benchmarks. According to Portfolio Visualizer, a $10,000 investment in 1977 with $500 monthly contributions would have grown to over $10 million by 2022.
That translates to a compound annual growth rate of over 17%, outpacing the S&P 500. This high return is partly due to the power of monthly compounding over long periods. Even investing small amounts consistently can add up exponentially over decades.
The portfolio saw a max drawdown of 50% during the 2008 financial crisis. But an investor who held steady and kept investing would have fully recovered. This highlights Buffett’s point about taking a long-term view and not panicking during market downturns. Time in the market is more important than timing the market.
Warren Buffett Portfolio & the 4% Rule
Some wonder whether the 90/10 stock/bond split is too aggressive for retirees following the 4% rule. Research by Javier Estrada suggests it can work well, with only a 2.3% failure rate in historical simulations.
The success rate was even higher with dynamic withdrawal strategies linking spending to market performance. However, more conservative allocations like 60/40 had zero failures. So retirees may want to ratchet down equity exposure, but not necessarily to shallow stock levels that reduce upside growth potential.
Retirees need flexibility and common sense around withdrawing money, not just a rigid percentage rule. No approach succeeds 100% of the time. Even relatively high equity allocations can provide income durability and portfolio longevity with reasonable adjustments.
Brokerage Accounts & the Warren Buffett Portfolio
Most brokers provide an easy way for those interested in implementing the Warren Buffett Portfolio. You can set up “pies” to automate investing in your chosen ETFs or stocks within an account.
You could do a 90/10 pie for the Warren Buffett Portfolio using Vanguard’s VOO or SPY for the S&P 500 and BIL for short-term Treasury bills. Most brokers automatically invest new deposits and dividends according to your pie allocations. Rebalancing is also automated.
Seeing the actual ETFs used can provide ideas for implementing this portfolio. Index investing has become much simpler over the past decade, with providers like Vanguard and Schwab offering low-cost, diversified ETFs covering major asset classes.[1]
It’s smart to rebalance your allocations back to the default allocations quarterly or once a year to lock in profits and buy the lower-cost ETF. It’s wise for compounding to use a tax-deferred account like a traditional IRA to allow it to grow tax-free. You will be taxed on stock dividends and bond income, and portfolio rebalancing in a taxable account.
Key Takeaways
- The Warren Buffett Portfolio comprises 90% in an S&P 500 index fund and 10% in short-term Treasury bills. This simple two-fund approach provides low-cost, diversified exposure to stocks and bonds.
- Historically, the Warren Buffett Portfolio has delivered excellent returns. The power of compounding turns consistent investments into exponential growth over long periods.
- The high stock allocation may work for retirees following dynamic withdrawal strategies that adjust spending to market conditions. However, more conservative investors may prefer dialing back equities exposure.
- Brokerage accounts offer an easy way to automate investing in ETFs for the Warren Buffett Portfolio. However, the principles can be applied using any provider’s low-cost index funds.
Conclusion
The Warren Buffett Portfolio exemplifies the legendary investor’s low-cost, long-term, diversified index investing philosophy. Though simple, just two broad index funds can harness the growth potential of the stock market while minimizing fees and taxes. Staying disciplined saves trying to time markets or pick individual stocks. Patience and persistence allow compounding to work its magic. For those who stick to these principles, the Warren Buffett Portfolio delivers a straightforward path to financial freedom in the long term.