Heads up! Whether you are learning about the Warren Buffett investment portfolio for the first time or interested in gaining deeper insights into the portfolio and how it works, you will find this article a great read. Among other things, I discussed the strategy of this lazy portfolio, the asset allocations, track records, downsides, and, of course, how you can set up a personalized Warren Buffett 90/10 Portfolio using certain exchange-traded funds (ETFs).
Key Takeaways
Before we get to the extensive discussions, here are the key takeaways;
- The Warren Buffett 90/10 Portfolio is a lazy portfolio attributed to Warren Buffett, the famous, super successful American businessman, philanthropist, and investor.
- The portfolio is a stock-bond portfolio comprising a 10% Short-Term Government Bond and a 90% low-cost S&P 500 index fund.
- The 90/10 rule associated with this portfolio is not absolute. It is ideal for investors not to look into long-term investment goals.
- The 90/10 strategy this portfolio adopts can be easily modified to reflect the risk tolerance of any investor.
- For example, you can recreate this portfolio by combining 90% Vanguard S&P 500 ETF (VOO) and 10% Vanguard Short-Term Treasury Index Fund ETF (VGSH).
- The Warren Buffett 90/10 Portfolio allows investors to invest without worrying about continuous rebalancing like other lazy portfolios.
Meet Warren Buffett
Warren Buffett is a household name in the investment scene. The Legendary investor also doubles as one of the wealthiest people in the world, ranking high on Forbes’ list of billionaires for several years. He runs Berkshire Hathaway, an American multinational conglomerate holding company owning over 60 companies.
Buffett is a follower of the Benjamin Graham school of value investing. The investment philosophy here is to hunt and uncover securities with unjustifiably low prices but excellent intrinsic worth. It is like discovering rare gems before others can. Warren Buffett’s idea of value investing forms the basis of his strategy, which has been adopted far and wide in the investment space.
The “Oracle of Omaha” has many titles and accomplishments to his name, within and beyond the financial space, including pioneering a popular investment model – the Warren Buffett Portfolio. It is essential not to confuse this with the common Buffett’s retirement plan.
The Warren Buffett’s 90/10 Portfolio
Unlike other lazy portfolios we have reviewed, there is an interesting background story to the 90/10 portfolio by Warren Buffett. It all started with a letter addressed to Berkshire Hathaway shareholders (Buffett’s company) in 2014. In the letter, Buffett personally described a simple portfolio outline depicting how he wanted his wife’s assets to be invested.
While Warren Buffett was not giving a piece of financial advice, people were quick to ask a few questions. “Why is Buffett recommending such an investment plan for his wife’s wealth?” “If it’s good for Buffett’s wife, what’s stopping me from adopting it?” Yes, Buffett’s enormous influence in the money world means his suggestions were considered head-on recommendations by the general public.
Now to the portfolio proper. Buffett’s outline translates to a lazy portfolio that makes investing super straightforward while guaranteeing relatively stable returns for everyone. Buffett had asked for his wife’s wealth to be invested into two low-cost index funds. The first index fund should cover a wide range of stocks, while the second index fund should represent a great collection of bonds.
He further instructed his estate trustee on the proportion of each fund. Buffett asked that 90% of his wife’s inheritance be invested into a low-cost index fund while the other 10% be put into short-term government funds. This allocation birthed the famous Warren Buffett’s 90/10 Portfolio, a 90%-10% split between a low-cost S&P 500 index fund and a short-term government bonds fund.
The Warren Buffett’s 90/10 Portfolio – Investment Strategy
The Warren Buffett 90/10 portfolio strategy is one of the simplest out there. It follows Buffett’s life-long investment advice: to consistently put money into well-researched, high-value, low-cost index funds while banking on the potential of compounding gains, as demonstrated by the S&P 500 index.
As an investor, Buffett’s personal investment decisions have shown that he prioritizes companies with large market caps. This preference was demonstrated in the portfolio. Buffett believes investors can enjoy large domestic companies’ stability and proven growth potential. Therefore, they serve as diversified, safe, and yet well-performing stocks investors should consider adding to their portfolio.
Interestingly, Warren Buffett’s choice of short-term government bonds over other safe-haven or fixed-income investment vehicles is hard to understand. But hey! We are talking about one of the most successful investors the world has seen. So, we can only agree with him in some cases.
The Warren Buffett’s 90/10 Portfolio – Asset Classes and Allocation
There are only two investments in Buffett’s portfolio, both into low-cost index funds. Therefore, it is one of the most straightforward lazy portfolios you can ever adopt. The first low-cost index fund investment is large-cap stocks, which are large-cap domestic equities. The second low-cost index fund investment is short-term government bonds, which have almost the same value as cash.
Summarily;
- 90% into Large-Cap Stocks
- 10% into Short-Term Government Bonds
You may want to question the diversification of this portfolio based on the asset allocation we have described above. And rightly, while Buffett said nothing about mid-cap and small-cap stocks nor international investments, the index funds he recommended are those tracking diversified groups of large-cap stocks trading on the S&P 500. That level of diversification should count for something.
Another interesting observation in the asset classes and allocation of Buffett’s portfolio is the short-term government bonds play. Why only short-term government bonds and not high-grade corporate bonds? These bonds are known to return only minimal gains, so anyone who is not looking to park cash should not be investing in them. But, again, Buffett recommended this strategy for his wife, who we all knew was in retirement, as a safer and risk-free investment play. This is also a different strategy from Buffett’s retirement advice.
The Warren Buffett’s 90/10 Portfolio – Track Records
Failure Rate
We have said a lot about the Warren Buffett 90/10 Portfolio, but not how it has performed in the past. The first real-life test of this portfolio was undertaken by Javier Estrada, a Spanish professor of finance at the IESE Business School, Barcelona.
According to Estrada’s report, Buffett’s 90/10 asset allocation strategy is less risky than it appears to be. She assessed 86 various 30-year intervals between 1900 and 2014 and discovered that Buffett’s portfolio recorded a very low failure rate of 2.3% compared to other funds. She further noted that Buffett’s portfolio failure rate was slightly worse than the 60/40 stock/bonds conservative portfolio everyone adopts.
Portfolio Performance
Here, we will assume to have created a hypothetical Warren Buffett’s 90/10 Portfolio, invested $10,000 into it in 2010, and invested another $10,000 into the S&P 500 index – a popular, traditional benchmark. Today, the $10,000 investment in Buffett’s portfolio would have recorded a total return of 313.44%, translating to about $42,000. Comparatively, the S&P 500 index would have grown by 273.43% in the same period. From this, we can conclude that Buffett’s portfolio is a better performer than the S&P 500 benchmark.
Portfolio Drawdowns
The Warren Buffett 90/10 Portfolio has had its worst days like other portfolios. For example, it recorded a drawdown of -30.73% between February and March 2020 – its worst drawdown ever. It took another five to six months to fully recover from this. Similarly, the lowest drawdown the portfolio has ever experienced was -6.49% between September and October 2014, and it took just 15 days to attain a full recovery.
Portfolio Volatility
Regarding volatility, there is little to separate Buffett’s portfolio and our benchmark – the S&P 500. The former’s maximum volatility recorded over time is 35.37% – about 4% less than S&P 500’s 39.16%. The same trend is observed if we consider a closer timeline, for example, a year or five years. I have summarized the track records of this portfolio below to give you as much information as possible at a glance;
- Expense Ratio – 0.03%
- Dividend Yield – 1.47%
- 10Y Annualized Return – 12.64%
- Sharpe Ratio – -0.10
- Maximum Drawdown – -30.73%
The Warren Buffett 90/10 Portfolio – The Drawbacks
Nothing so far has suggested that the Warren Buffett 90/10 Portfolio is perfect – not even the fact that it was proposed by one of the biggest businessmen in the world. That is because this portfolio is not perfect. Here are a few drawbacks you should know about:
1. Beating the market is not certain.
There is nothing serious to separate the S&P 500 and the Warren Buffett portfolio in terms of total returns. But this does not indicate it will perform better than the market. So, it is not wise advice to invest almost all your retirement savings in it.
2. Increased risk of volatility.
It is a standard financial advisor tip to avoid allocating a more significant part of your assets to fixed-income securities. And that is because it makes your portfolio less volatile. In the case of Buffett’s portfolio, 90% of your portfolio is invested in equities – this translates to higher volatility-related risk.
3. Only large companies and short-term government bonds.
Small companies can offer potentially high returns compared to the larger companies, despite the slightly increased risk of such investments. But the Warren Buffett Portfolio is literally not taking any risk – it altogether avoided the smaller companies, focusing only on large companies. Similarly, only 50% of the global market cap is covered by the United States market. This portfolio limits investors to the domestic market, with zero exposure to the international stock market.
Therefore, adopting this portfolio will deprive you of the massive growth opportunities small companies and international companies bring to the table.
Recreating the Warren Buffett 90/10 Portfolio Using ETFs
Another reason the Warren Buffett portfolio is popular among investors is its ease of replication, especially with exchange-traded funds (ETFs). You have to look for an ETF that invests in stock holdings and government bonds.
For example, if you are a Vanguard fan, you can create your own Warren Buffett 90/10 Portfolio using Vanguard Short-Term Treasury Index Fund (VGSH) as your government bond fund equivalent and the Vanguard S&P 500 ETF (VOO) as your stock-based index funds.
In summary:
- 90% Vanguard S&P 500 ETF (VOO)
- 10% Vanguard Short-Term Treasury Index Fund ETF (VGSH)
Alternatively, if you want exposure to the international stock market, you can replace the Vanguard S&P 500 ETF (VOO) with the Vanguard Total World Stock Index Fund ETF (VT). Then it becomes:
- 90% Vanguard Total World Stock Index Fund ETF (VT)
- 10% Vanguard Short-Term Treasury Index Fund ETF (VGSH)
The Vanguard Total World Stock Index Fund ETF (VT) offers a decent shot at the international market. It is also cheap – with an expense ratio of 0.08%.
Final Words
With the Warren Buffett Portfolio, you get a measured but diversified exposure to stable, large companies. This translates to excellent opportunities to make decent returns without doing much, depending on your personal finance goals. It is arguably the best shot for anyone who wants their money to start working for them as soon as possible. The portfolio is also flexible and allows investors to adjust based on the current market conditions.
Who Should Adopt Buffett’s 90/10 ETF Portfolio?
We cannot overemphasize the fact that this portfolio is not for everyone. Most investors should not follow Warren Buffett’s strategy, irrespective of how much respect or admiration they have for him. That said, the portfolio is still great for some investors.
For instance, young investors below or close to 35 will have no problem adopting the 90/10 investment strategy of Warren Buffett. In fact, we can call them the primary target group for this portfolio type. Due to their young age, these investors still have enough time on their hands to take risks. So, even if there is a drawdown, they are more likely to recover. But an investor near retirement would not want to put nearly all or all of their retirement savings in this portfolio.
In addition, new investors who are just joining the system should avoid Warren Buffett’s ETF portfolio. Instead, they are better off with a simple portfolio, like the 60/40 strategy, that basically keeps things ticking. This recommendation is coming on the back of the fact that these individuals have little or no experience and knowledge to understand the complexities of funds and investments.
In line with one of Buffett’s investment philosophies, you can save considerably on managed funds and other investment costs by adopting this strategy. You are taking your destinies from the hands of high fee managers and mutual fund-based investments. If you are unsure, please speak with your financial advisor.
Finally, none of the information above should be considered or taken as investing advice. I always recommend speaking to a personal finance advisor for proper guidance on your investing journey.
You can check out other lazy portfolio reviews and more investment articles if you enjoy this article and more investment articles here. Good luck!