Financially reviewed by Patrick Flood, CFA.
Contrary to popular belief, the Warren Buffett Portfolio is actually a fairly high-risk portfolio. Here we’ll check out its components, historical performance, and the best ETF’s to use for it.
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Contents
What is the Warren Buffett Portfolio?
Hopefully Warren Buffett needs no introduction. He is arguably the most successful investor in history, among other things, consistently outperforming the market historically. Don’t let this fool you, though. Buffett is the first to admit that retail investors should keep it simple and invest in an S&P 500 index fund.
Warren Buffett himself has never actually written any books. But if you’re interested in his style of investing, he has stated that his favorite book is The Intelligent Investor by Benjamin Graham, an excellent introductory resource on Value investing. The recent revised edition contains some great commentary by the legendary Jason Zweig. You can also find the famous collection of Warren Buffett’s letters to shareholders over 30+ years here.
The Warren Buffett portfolio became famous when, in a 2013 letter to Berkshire Hathaway shareholders, Buffett indicated that upon his passing, the trustee of his estate will invest 90% of his wife’s inheritance in a low-cost index fund and 10% in short-term government bonds.
Note that Buffett admits that this specific allocation may not be suitable for everyone. More risk-averse investors will likely prefer a lower allocation to equities.
Interestingly, recent research from Javier Estrada, professor of finance at the IESE Business School in Barcelona, Spain, suggests that Buffett’s prescribed 90/10 allocation may actually not be as risky as it appears at first glance. Estrada looked at 86 different 30-year intervals between 1900 and 2014, and found that at a typical 4% withdrawal rate in retirement, Buffett’s 90/10 portfolio had an extremely low failure rate of only 2.3%, only slightly worse than the traditional “conservative” 60/40 stocks/bonds portfolio.
The Warren Buffett portfolio is as follows:
- 90% US Large Cap Blend
- 10% Short-Term Treasury Bonds
If I’m nitpicking, I’d prefer to see some small allocation to ex-US stocks, but history has shown that indexing the S&P 500 is a solid investment. I’m also of the mind that young investors should be using long- or intermediate-term treasury bonds over short-term treasury bonds.
Warren Buffett Portfolio Performance Backtest
Going back to 1977, here’s a comparison of the Warren Buffett Portfolio and the S&P 500 through 2019:
As we’d expect, the results have been very close, with the Warren Buffett achieving a slightly higher risk-adjusted return (Sharpe) due to the diversification benefit of the inclusion of short-term treasuries.
Warren Buffett Portfolio ETF Pie for M1 Finance
M1 Finance is a great choice of broker to implement the Warren Buffett Portfolio because it makes regular rebalancing seamless and easy with one click, has zero transaction fees, and incorporates dynamic rebalancing for new deposits. I wrote a comprehensive review of M1 Finance here.
Using entirely low-cost Vanguard funds, we can construct the Warren Buffett Portfolio pie with the following ETF’s:
- VOO – 90%
- VGSH – 10%
You can add the Warren Buffett Portfolio pie to your portfolio on M1 Finance by clicking this link and then clicking “Invest in this pie.”
M1 Finance is actually currently offering a 1-year free trial of M1 Plus (gets you 2% margin, 1% APY and 1% cash back, and access to Smart Transfers) for users who sign up before January 31, 2021, a $30 bonus for new users who fund their account with $1,000 or more during the month of January 2021, and a transfer promotion bonus for up to $3,500 when transferring an existing account from another brokerage, as outlined below:
Interested in more Lazy Portfolios? See the full list here.
Disclaimer: While I love diving into investing-related data and playing around with backtests, I am in no way a certified expert. I have no formal financial education. I am not a financial advisor, portfolio manager, or accountant. This is not financial advice, investing advice, or tax advice. The information on this website is for informational and recreational purposes only. Investment products discussed (ETFs, mutual funds, etc.) are for illustrative purposes only. It is not a recommendation to buy, sell, or otherwise transact in any of the products mentioned. Do your own due diligence. Past performance does not guarantee future returns. Read my lengthier disclaimer here.
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