The 90/10 Warren Buffett Portfolio?

By Dr. Jim Dahle, WCI Founder

There's a strange idea floating around among investors that Warren Buffett thinks you should have a 90/10 asset allocation. This is not true for several reasons.

First, Warren Buffett, like Jim Dahle, is not dumb enough to tell you what your asset allocation ought to be. (I tell people to pick something reasonable and stick with it.) In fact, you shouldn't take anyone's advice about asset allocation until they've spent a couple of hours chatting with you about your personal finances, hopes, dreams, goals, and past financial behavior. Experienced financial planners know this, but apparently too many of the rest of us do not.

Second, this is not Warren Buffett's portfolio. Warren Buffet's wealth, like that of many entrepreneurs including yours truly, is mostly tied up in his small business. He's worth something like $150 billion and almost all of that consists of Berkshire Hathaway stock. He owns almost 32% of the company. If you want, we can dive into the details of what Berkshire Hathaway owns. Berkshire is an insurance company, and it has substantial reserves. As I write this article near the end of 2024, those reserves are invested in mostly US large cap stocks ($313 billion) and cash ($277 billion). Top holdings among the stocks include Apple, American Express, Bank of America, and Chevron, although it recently sold a bunch of Apple stock (615 million shares or so). If Warren Buffett has an asset allocation, it would be 53/47, with most of that 53% in US large cap stocks.

The 2013 Annual Letter

Where does this 90/10 idea come from? It comes from Buffett's Berkshire Hathaway Annual Letter to Investors from 2013. Unlike most articles on this topic, I'm going to quote the ENTIRE relevant section. The bolding is mine.

“Most investors, of course, have not made the study of business prospects a priority in their lives. If wise, they will conclude that they do not know enough about specific businesses to predict their future earning power.

I have good news for these non-professionals: the typical investor doesn’t need this skill. In aggregate, American business has done wonderfully over time and will continue to do so (though, most assuredly, in unpredictable fits and starts). In the 20th century, the Dow Jones Industrials index advanced from 66 to 11,497, paying a rising stream of dividends to boot. The 21st century will witness further gains, almost certain to be substantial. The goal of the non-professional should not be to pick winners—neither he nor his “helpers” can do that—but should rather be to own a cross-section of businesses that in aggregate are bound to do well. A low-cost S&P 500 index fund will achieve this goal.

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.

If ‘investors' frenetically bought and sold farmland to each other, neither the yields nor prices of their crops would be increased. The only consequence of such behavior would be decreases in the overall earnings realized by the farm-owning population because of the substantial costs it would incur as it sought advice and switched properties.

Nevertheless, both individuals and institutions will constantly be urged to be active by those who profit from giving advice or effecting transactions. The resulting frictional costs can be huge and, for investors in aggregate, devoid of benefit. So ignore the chatter, keep your costs minimal, and invest in stocks as you would in a farm.

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 10 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.”

I don't see how anyone can come away from reading that selection with anything other than the idea that Warren Buffett thinks most stock investors should be buying and holding shares of low-cost, broadly diversified index funds during their careers. That's it. That's the point of this selection. When he says, “What I advise here,” he is talking about what he said BEFORE that sentence (use index funds), NOT what he said AFTER that sentence (about specific instructions to the trustee of his wife's trust).

More information here:

Do What Buffett Says, Not What He Does

Let’s Celebrate Taylor Larimore’s 100th Birthday by Asking Him 4 Questions About Money

The 90/10 Portfolio

So, 90/10, with 90% in the Vanguard 500 Index Fund and 10% in short-term government bonds, is his recommendation for his wife's trust. By the way, his wife is in her late 70s, and Warren will presumably be leaving her many millions of dollars. Certainly enough that the 10% in cash is more than most people retire with in total.

90/10 is NOT a recommendation for Warren's kids, you, or anybody else. It is a very specific recommendation to a very specific trustee who will likely only be managing that money for something like 12 years. It is also likely that it is enough money that it really doesn't matter what asset allocation is used. If it's 100% stocks, fine. If it's 100% cash, also fine. Anything in between is also going to be fine for those 12 years.

Is 90/10 Reasonable?

A 90/10 portfolio is reasonable for plenty of people. These include young people who still have much of their earnings ahead of them. These include very wealthy retirees who spend only a tiny percentage (1%-2%?) of their portfolio every year. These include many investors with a substantial need, desire, and ability to take risk.

Is the S&P 500 a reasonable choice as an only stock holding? Yes, I think it's reasonable, but I don't think it's ideal at all. I bet if you pinned Warren down on it, he'd agree with me. If you only want to use one fund, I think VT (a world stock index fund) or at least VTI (a total US stock market index fund) would be better than VOO (the S&P 500 index composed of only large cap US stocks).

Are short-term Treasuries a reasonable bond holding? Yes, they are. This is a classic example of “taking your risk on the equity side.” Treasuries are very safe bonds. Short-term bonds are very safe bonds. Combine the two, and you get ultra-safe bonds. Which is good, since there is plenty of risk being taken on the equity side. Buffett has never been a big fan of bonds, so nobody should be surprised to see him recommending bonds that are only a little different from cash. Short-term Treasuries minimize term risk, creditor risk, and inflation risk. There's a lot to be said for that. My own bond portfolio really isn't all that different from a bunch of short-term Treasuries.

More information here:

VFIAX vs. VOO: What Is the Best 500 Index Fund?

How Do You Evaluate and Compare Mutual Funds and Exchange Traded Funds?

The Bottom Line

Warren's point in his 2013 letter was that if you're not Warren Buffett, you should be buying index funds rather than individual stocks. Don't read anything more into it. Choose your own asset allocation carefully based on your own finances, goals, and investing behavior. And just know that 90/10 is not right for everyone.

What do you think? Do you take investing advice from Warren Buffett? Why or why not? What do you think the point of his 2013 letter was? 

The post The 90/10 Warren Buffett Portfolio? appeared first on The White Coat Investor - Investing & Personal Finance for Doctors.