Investing

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 has 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 assess 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?

Podcast of the Article:

Rob Berger

Rob Berger

Rob Berger is the founder of Dough Roller and the Dough Roller Money Podcast. A former securities law attorney and Forbes deputy editor, Rob is the author of the book Retire Before Mom and Dad. He educates independent investors on his YouTube channel and at RobBerger.com.


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