DR 041: A Rare Glimpse into Warren Buffett’s Asset Allocation Plan (including the mutual fund he would pick)

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Excerpts from Warren Buffett’s letter to Berkshire Hathaway investors have been released. In the latest excerpt, Buffett talks about investing in mutual funds, of all things. Specifically, in his will he leaves money to his wife in trust. He has provided guidance on how he thinks the trustee should invest these funds.

Think he wants the trustee to put all of the money in Berkshire Hathaway stock? Think again. His plan may surprise you.

Here’s what he says:

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 Hathaway (BRKA) 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. (VFINX)) 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.

There’s a lot we can learn from this.

Buffett is bullish on stocks

With 90% of the portfolio in stocks, Buffett is demonstrating his strong preference for stocks. Many experts would view such a heavy tilt toward equities as too aggressive. Perhaps that’s true for those investors who can’t stick to their asset allocation plan in down markets, something that’s never been an issue for Warren Buffett (and presumably won’t be after his passing!).

A 90% allocation to stocks underscores Buffett’s view of risk: “The riskiness of an investment is not measured by beta . . . but rather by the probability…of that investment causing its owner a loss of purchasing power of his contemplated holding period. Assets can fluctuate greatly in price and not be risky as long as they are reasonably certain to deliver increased purchasing over the holding period. And . . .a non- fluctuation asset can be laden with risk.”

Here’s my take on this issue–Bonds vs Stocks–Which is Riskier?

Buffett avoids interest rate risk on bonds

The 10% allocated to bonds goes to short-term government bonds. As such, he is eliminated both credit risk (i.e., risk of default) and interest rate risk (the risk that interest rates will rise). It’s clear he’s not looking to the bond portion of this portfolio to drive gains. It does, however, raise an interesting question. Why have bonds in the portfolio at all?

There could be a couple of answers. Having some bonds does reduce the volatility in a portfolio. Ten percent doesn’t make a huge impact in this regard, however. It may also provide a source of income when the stock market is down (a time when Buffett certainly would not want to sell).

Buffett is bullish on the future of the United States

It’s interesting that 100% of the stock allocation is in U.S. companies. His portfolio has no exposure to foreign headquartered enterprises. That’s not to say there is no foreign exposure. The companies making up the S&P 500 have significant operations around the world. Many of the firms generate more revenue overseas than in the U.S. Still, Buffett is clearly bullish on the future of America.

Buffett keeps costs to a minimum

It’s nice to see him focused so much on costs. While not a surprise, it helps communicate the message that fees matter. He’s sticking with low cost, passively managed, index funds. He even gives a nod to my favorite mutual fund company, Vanguard.

If I could dare to be so bold as to make a recommendation to Buffett, however, I’d suggest the trustee go with the admiral shares of Vanguards S&P 500 (VFIAX) rather than the investor class share (VFINX). Admiral shares sport an expense ratio of just 0.05% compared with 0.17% for the investor class. Of course, VFIAX does require a minimum $10,000 investment, but I’m guessing Buffett can swing it.

A few words of caution: We can learn a lot from how Buffett will direct the trustee to invest assets for his wife. I would not, however, suggest that anybody follow his asset allocation and fund selection blindly. It’s likely that enough assets will be put in trust to allow his wife to live comfortably off of the dividends alone. We each must asses our specific situation, risk tolerance, time to retirement, and a variety of other factors before settling on an investment plan.

With that said, what do you think of Buffett’s asset allocation plan and fund selection?

Published or Updated: February 26, 2014
About Rob Berger

Rob founded the Dough Roller in 2007. A litigation attorney in the securities industry, he lives in Northern Virginia with his wife, their two teenagers, and the family mascot, a shih tzu named Sophie.

Comments

  1. Kenneth says:

    Rob, I have to believe that a handpicked trustee for Warren Buffett’s wife portfolio, would figure out to use the Admiral shares. In fact, if you have over $10,000 I believe in such a fund, Vanguard would switch it over for you automatically.

    For people with a long time horizon (10+ years) or a lot of money (if she gets a billion, even if the market has a 75% drop, she still has $250mm left to live on), 90/10 is very reasonable. For me, I’m retiring in <2 years. I just yesterday dropped my allocations to 30/70 stocks/bonds. I see some major headwinds coming (China is a house of cards, and energy, oil and gas, are big issues despite what the press says – majors are severely cutting back on their exploration/drilling budgets because even at $100 – $110/barrel, they can't make money). So I'm at 30/70. For young people, I recommend the opposite, 70/30 or even higher weight to stocks. Why? Because over time, the stock market always comes back with a vengeance, and if you're young, you want to go thru some big pullbacks so you are dollar cost averaging at a lower price.

    • Rob Berger says:

      Kenneth, you are quite right about Vanguard. They do switch you or at least let you know about the admiral shares. The 30/70 split is interesting to me. I’m not quite that close to retirement, but I’ve always imagined I’d be at 50/50 or even 60/40. Of course, that’s easy to say, but as I get closer, who knows.

      • Kenneth says:

        My friend Roger runs a site called asset allocation central http://assetallocationcentral.com/

        It’s worth perusing. I listened to your podcast on asset allocation also.
        One of the things Roger points out, is it is worth cutting your stock allocation 10 points if the Shiller PE10 ratio is at 25 or above – which it is: http://www.multpl.com/shiller-pe/

        Being 64, I should be at an age adjusted allocation ratio of 100 – 64 or 36. Adjusted down 10 points for the Shiller PE ratio, I should be at 26 percent stocks. But what the heck, I’m a risk taker and greedy, so I rounded it up to 30 percent! If we can get a 10 percent drop from any high water mark, I’ll add 20 percent to my stock allocation (10 for each 10 percent drop, and the Shiller PE10 adjustment would no longer be necessary).

        • Rob Berger says:

          Kenneth, interesting approach to asset allocation. Still, I don’t change my asset allocation based on the performance of the stock market. I just don’t think I’m that good at timing the market. It will be interesting to see how your approach works out in the end.

  2. Kenneth says:

    Rob – I took your advice from this podcast and listened to the DoughRoller podcast 23 interview with Larry Swedroe. I changed my asset allocation back to 60/40 (I’m 64) and this is what I wrote in my personal blog today:

    “When my golf game goes astray, I visit my local pro to seek advice. Guess what? He doesn’t suggest new expensive clubs or improved golf balls, no! he checks my fundamentals…stance, grip, muscle tension, etc. All very basic fundamentals! It is no different in managing your money. Just the basics and keep it simple.”

    60/40 stocks/bonds at Betterment (automatic rebalancing). Leave it alone. That’s the fundamentals!

    I’ve fiddled with my asset allocation on Betterment too many times. Was at 75/25 stocks/bonds, then reduced it to 30/70 yesterday. Today I put it back to 60/40 stocks/bonds. This was after I listened to the Dough Roller podcast 23 interview with Larry Swedroe.

    I want to make 60/40 my lifetime allocation for stocks/bonds. The rule of thumb is how much downside can I stomach? I’m saying 30%, so in a stock market drop of 50%, my portfolio should be down 30% and I am OK with this (but not thrilled of course). Betterment is a terrific place to keep my money, because they automatically rebalance portfolios in a tax efficient manner, to keep me close to my desired 60/40 allocation.

    Stay the course plan for withdrawal phase:
    Each year, take note of my investment balance.
    Take a 4 percent withdrawal.
    Put the withdrawal in a cash savings account, and draw 1/12 each month as an income supplement.
    Each year thereafter, repeat the process, using 4 percent of the invested balance.
    Exception: If the invested balance is down more than 10 percent from the prior year beginning invested balance, forgo the income supplement draw for that year, and tighten our belts as necessary.

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