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Warren Buffett ETF Portfolio – Guide to Asset Allocations, Pros & Cons


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Warren Buffett needs no introduction. He’s one of the most famous fund managers in the world and was once one of the richest people on the planet before he began giving big pieces of his amassed fortunes to charity. The most recent donation was a $4.1 billion dollar chunk of his company, Berkshire Hathaway, he gave away in 2021, according to BBC.

Often called the Oracle of Omaha, Buffet is known to outperform the stock market by picking stocks that represent downtrodden companies and others with low valuations and strong profitability metrics.

Wouldn’t you love to invest in a portfolio he designed?

Well, you can! In 2013, Buffett himself outlined a specific exchange-traded fund (ETF) portfolio strategy in his letter to Berkshire Hathaway shareholders. That portfolio quickly became famous as the Buffett ETF Portfolio, also known as the Warren Buffett Portfolio.

What Is the Warren Buffett ETF Portfolio?

Berkshire Hathaway shareholders received a letter in 2013 from Buffett himself outlining a simple portfolio that quickly became a famous concept. The portfolio was a simple-to-follow outline of how he would like his wife’s assets invested when he dies.

Of course, the first thing the investing community thought was, “If it’s a good way for Buffett’s wife to invest, it should work out for me too.”

So, what exactly is the portfolio? It’s about the laziest of lazy approaches to investing, but it’s also highly effective at generating relatively stable returns.

The portfolio consists of investing in two low-cost index funds, one of them representing a diverse group of stocks, and the other representing an interesting set of bonds. Yes, that’s it — two investments in two separate asset classes make up Buffet’s go-to strategy for his wife in the event that he passes first.

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Portfolio Asset Allocation

The asset allocation within the portfolio is extremely simple. After all, you’ll only be making two investments. Here’s how the allocation works:

  • 90% in Large-Cap Stocks. In his letter to shareholders, Buffett said that 90% of his wife’s assets would be invested in large-cap domestic equities.
  • 10% in Short-Term Government Bonds. Buffett suggested the remaining 10% of his wife’s portfolio should be invested in short-term government bonds, which are nearly equivalent to cash.

What About Diversification and Asset Allocation?

If you’re a new investor who’s been doing your research, you’ve heard how important it is to diversify and properly allocate your portfolio’s holdings. Does that all go out the window when it comes to Buffett’s portfolio?

Although it’s impossible to know what the investing mogul had on his mind when he devised the portfolio, there seems to be some logic to its allocation strategy.

While there is no mention of small-cap or mid-cap stocks in the portfolio and no push for international investments, it does call for an index fund that tracks a diversified group of large-cap stocks listed on the S&P 500. So there’s at least some level of diversification in the stock holdings of the portfolio.

On the other hand, it’s hard to come to a conclusion as to why Buffett wants 90% of his wife’s investments in equities. That’s a risky choice even for the youngest of investors, let alone someone in retirement.

Also, the bond holdings in the portfolio are all in short-term government bonds. That’s another interesting play, considering the fact that returns on these types of bonds are minimal. Most investors look at these assets as a way to park cash and nothing more.

Of course, cash isn’t a hedge against inflation or poor market conditions, so the verdict is still out on why that allocation exists within the portfolio.

Research Says the Risks Are Minimal

The portfolio may seem to be an uber-risky play at first glance. Most financial advisors would tell you that you should never have 90% of your money tied up in stocks, period.

But at least one researcher concluded that the risks aren’t as big as you might think. Javier Estrada, a professor of finance at the IESE Business School in Barcelona, Spain, studied 86 different 30-year time periods between 1900 and 2014. He found that with the typical 4% withdrawal rate in retirement, the portfolio has a failure rate of just 2.3%, which is actually nearly in line with the traditional 60/40 portfolio that’s perceived as a very safe option.

The Investment Thesis Behind the Portfolio

Interestingly enough, the investment portfolio essentially follows the same advice that Buffett has given to investors for years. If you follow Buffett’s advice, you know that he has long pointed investors toward high-quality, low-cost index funds, pointing out the potential of the compounding gains of the S&P 500 index.

His career also reflects the thesis behind the portfolio. Buffett has largely focused his investment power on companies with large market capitalizations, which is part of the prescription in this portfolio.

Large domestic companies provide a sense of stability and a long history of growth. By investing in them, you bring a diversified, relatively safe group of stocks into your investment strategy.

Again, it’s difficult to determine why Buffett thinks 10% of the portfolio should be invested in short-term government bonds instead of any other fixed-income or safe-haven investments, but he’s the Oracle of Omaha, and he’s known for seeing what others don’t.


Pros and Cons of the Warren Buffett ETF Portfolio

The Warren Buffett ETF Portfolio wasn’t designed as a perfect fit for everyone. Buffett himself would tell you it’s not a good fit for all investors. As with any portfolio, it comes with its pros and cons.

Buffett Portfolio Pros

There are plenty of reasons to get behind the portfolio, with the top among them being:

  1. Come On — It’s Warren Buffett. Buffett is no slouch who got lucky on one or two trades. Throughout his career, he has been right more times than wrong about what’s going to happen in the market, and his decisions based on his opinions led to him amass incredible wealth. Why wouldn’t you take his advice?
  2. Exposure With Stability. The portfolio suggests that 90% of your portfolio should be invested in equities. While this is a risky choice, much of that risk is offset by investing in the largest companies in the U.S., offering a level of stability. As a result, you end up with heavy exposure to the market without all that much additional risk if you believe Estrada’s findings.
  3. Meaningful Returns. Historically, the portfolio has generated returns that have been right in line with, or slightly below or above, those of the S&P 500. If your portfolio is in line with the flagship benchmark index of the U.S., you know you’re doing something right.

Buffett Portfolio Cons

There are plenty of reasons to be excited about using this portfolio strategy, but the Buffett portfolio does have drawbacks that should be considered before diving in. They include:

  1. You Won’t Beat the Market. The total return of the portfolio is similar to that of the S&P 500, but don’t expect your returns to beat the market. If that’s your goal, you’re going to need to follow another strategy.
  2. No Small Companies. Although investing in small companies comes with increased risk, they have a long history of outpacing the returns generated by their larger counterparts. Unfortunately, this portfolio is only geared toward investing in large companies, meaning investors will miss out on the tremendous growth opportunities the little guys have to provide.
  3. No International Exposure. The United States market only represents about 50% of the global market cap. By avoiding international exposure, your portfolio misses out on half the opportunities the global market has to provide.
  4. Volatility. The reason most financial advisors suggest that a larger portion of your assets should be held in fixed-income investments is to reduce your volatility-related risk. After all, the market is a volatile place, and with 90% of your assets tied up in equities, you’ll be exposed to the significant ebbs and flows it often experiences.

Who Should Use the Warren Buffett ETF Portfolio?

Buffet himself has said that the investment strategy behind this portfolio isn’t designed for everyone. However, there are plenty of investors who could benefit from investing this way.

Young Investors

Young investors, particularly those under 35 years of age, are the prime candidates for this style of portfolio. These investors have plenty of time for their portfolios to build and can afford to recover should a drawdown take place.

On the other hand, middle-aged investors should be cautious and those nearing or entering retirement should probably avoid it. Although Estrada found the risks are similar to a 60/40 portfolio, even that may be too much for investors who will soon depend on — or already depend on — their investments to pay their living expenses.

Investors Who Are Learning

When you’re just getting your feet wet in the market, it’s best to keep your portfolio simple until you’ve done enough research to get a good understanding of the complex system that acts as the heartbeat of Wall Street.

This portfolio gives you diversified exposure to large, stable companies, offering up the opportunity to generate meaningful returns with very little time and effort involved. This lets you begin investing now so you can put your money to work immediately, and you can always adjust as you learn more.


How to Duplicate the Portfolio

Duplicating a portfolio that only has two assets is relatively simple. However, it’s important to keep Buffett’s key points in mind. First, exposure to large caps is a must, and you should only invest in low-cost funds.

The Traditional Buffett Portfolio

The traditional Buffett Portfolio can be put together easily with two exchange-traded funds.

  1. 90% in Vanguard S&P 500 ETF (VOO). The first of the two Vanguard funds is the VOO, a low-cost S&P-500-focused investment. The expense ratio on the fund is just 0.03%, making it one of the lowest-cost funds on the market today, and it was designed to track the 500 largest publicly traded companies in the United States.
  2. 10% in Vanguard Short-Term Treasury Index Fund ETF (VGSH). The second of the two funds is VGSH, a fund that invests in a diversified group of short-term Treasury debt securities.

Pro tip: You don’t have to build the portfolio yourself. You can use M1 Finance and simply load the Warren Buffett ETF Portfolio prebuilt expert pie to gain access to a curated allocation of securities that follows this strategy. It’s tough to imagine making investing any easier.

The International Buffett Portfolio

One of the biggest arguments experts have against the portfolio is the fact that it lacks any exposure to international markets.

If you’d like to add an international touch to your portfolio, you can do so by replacing VOO with the Vanguard Total World Stock Index Fund ETF (VT). The fund is made up of a diversified list of stocks in the U.S. and abroad.

The VT fund is one of the best ways to get global investment diversity, and you’ll do so with an expense ratio of just 0.08%.

The Diversified Market Cap Buffett Portfolio

Another gripe some experts have had with the portfolio is that it leaves out small-cap opportunities.

As mentioned above, smaller companies have a long history of outperforming their larger counterparts over the long run, and excluding them could mean missing out on big growth opportunities.

To bring small market capitalization opportunities into the mix, simply cut your holdings in the VOO in half, bringing your total holdings in the fund to 45% of your portfolio’s allocation. This frees up 45% that you can allocate to the Vanguard Small-Cap Index Fund ETF (VB). This fund invests in a diversified portfolio of domestic small market cap companies.


Keep Your Portfolio Balanced

No matter what portfolio strategy you choose to follow, it’s important to keep it balanced. Ultimately, every piece of a well-thought-out strategy is there for a reason — some to expose your portfolio to gains and some to protect your portfolio from risk.

As time passes, the prices of assets in your portfolio will change, some faster than others, leading to an imbalance. It’s important to correct this imbalance through a process known as rebalancing before it increases your risk or limits your return potential.

This particular portfolio is unique because there’s not much to balance and it’s heavily allocated to a single asset. This, combined with the fact that it’s a “lazy” buy-and-hold portfolio, means you won’t have to rebalance much. However, you should make sure your portfolio is in balance at least twice annually.


Final Word

There are some interesting features to the Warren Buffett ETF Portfolio, but that comes with the territory — Warren Buffett is an interesting person. However, just because the portfolio was suggested by Buffett himself doesn’t make it a good fit for everyone.

Particularly, investors who are nearing or in retirement should avoid this strategy like the plague, because its drawdown risks are far too high for those without a huge fortune to fall back on.

Also, if you do choose to use this strategy, don’t be afraid to get creative. Consider adjusting the 90% stock holdings in a way that fits your investing goals and potentially adjusting the 10% holdings in government bonds by switching it out for something that offers a bit more stability.

With a little research into the best ETFs that fit in with your investing strategy, you can easily make the portfolio your own.

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