The Warren Buffett Portfolio -- 2 Index Funds to Rule Them All

hey everybody welcome back to the financial freedom show my name is rob berger in today's episode we're going to be talking about what's called the warren buffett portfolio you all know warren buffett he is the ceo of berkshire hathaway considered probably the best investor of all time and uh he gives a lot of great wisdom and perspective when it comes to investing and he does it in a number of ways but perhaps the the most important is through his letters each year to berkshire hathaway shareholders full disclosure i am uh i own berkshire hathaway stock i've been to the berkshire hathaway uh meeting in omaha i think twice now uh and i'm a big warren buffett fan but he said something very interesting in the 2013 berkshire hathaway shareholder letter and that's what we're going to talk about today and what he did was he laid out what he thought was a great portfolio for average investors like you and me in fact he even said that the portfolio and i'm going to walk through what it looks like exactly what he said but he said it would it would outperform over the long term even those portfolios used by pension funds and institution institutional investors that pay a fortune to advisors and the portfolio is so simple in a past video i talked about the three fund portfolio which is pretty simple well the warren buffett portfolio is only two funds so it's i guess the two fund portfolio so let's get right to it let me first show you uh what it looks like so this is his 2013 letter and i'll leave a link to this below the video and what i want to do before we actually get to uh the actual portfolio is kind of put this in context in this letter and we're looking at page 19 he starts talking about how he and charlie munger the vice vice chairman i think is his title if i've got it right but warren buffett's business partner how they go about thinking through their investments and and they they do that and gives insight into that every year and uh they talk about that but what's interesting in this particular letter is he talked to folks like you and me folks that maybe don't have the background in finance that a warren buffett or charlie munger does or just don't want to spend the time that it takes and i want to focus on this paragraph right here where he says i have good news for the these non-professionals i.e you and me the typical investor doesn't need this skill and he's referring to the skill that he has and the charlie munger have 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 jones industrial av 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 and by that he means financial advisors can do that but should rather be to own a cross-section of business that in aggregate are bound to do well a low-cost s p 500 index fund will achieve this goal now that starts to give you some perspective on where this warren buffett portfolio is headed it's a two fund portfolio and yes one of the funds no surprise an s p 500 index fund before we get to the rest of it though let's go back to his letter because there's still uh some important things some important nuggets to get out of this and it's in the next paragraph he says that's the what of investing for the non-professional the win 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 let me stop there got to be one of the best quotes of all times because it really does i think encapsulate perhaps in a silly way what it might feel like right now right because equities are expensive on his based on at least historic standards if you look at a p e price to earnings or price to book stocks ain't cheap and one wonders you know is it going to be coming to an end soon of course no one knows and those who think they know you don't but here's what warren buffett says about that let's go back to his letter right here he says the antidote to that kind of mistiming is for an investor to accumulate shares over a long period and never 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 long-term results than the knowledgeable professional professional who is blind to even a single weakness honestly we could probably throw out all of the books on investing just put in those couple of paragraphs and frankly that's about all you really need so what does the warren buffett portfolio look like well you already know one of them it's the s p 500 index fund he recommends putting 90 in an s p 500 index fund he specifically identifies vanguard but i'm guessing he would be quick to say any low cost s p 500 index fund would do and the other 10 he puts it in just a low-cost index fund that invests in u.s uh short-term government bonds that's it pretty simple now let's go back to his letter one more time this is where he talks about it right here and he says look i'm not just talking here this is actually how i've advised the the trustees who will take care of money that he is going to leave to his wife that's how he wants them to invest it it's kind of interesting you know he doesn't say to the trustees take the money i'm going to leave my wife and put it in berkshire hathaway stock or for that matter tesla or amazon or arc etfs he says no no no 90 in an s p 500 index 10 in in of the cash and short term government bonds and i love this line right here he says 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 now that last part is important he didn't say that that this portfolio will do better than anybody that uh better than all individuals better than all pensions better than all institutions what he said was it will do better than those who employ uh high fee managers so that would just about include every hedge fund right uh their two and twenty uh model uh it will include pensions who who use hedge funds and other expensive advisors to manage their portfolios and it'll include you and me if we go to a you know investment advisor who wants to charge us one percent of assets under management or goodness even more and on top of that put us in expensive mutual funds so that's the warren buffett portfolio now i'm not going to stop there i want to look at a couple of other things in this video the first is well goodness how well has this portfolio done if we can look back in the past you know what can we expect from this so we can do that i'm going to walk through how and i'm going to walk through the how and the tool that i use it's called portfolio visualizer but i'm going to do that so you can do this for yourself not just for this portfolio but any portfolio right so let's take a look at that on the screen here's portfolio visualizer it's literally just portfoliovisualizer.com this is the home page it's a free tool and you come over here to back test asset allocation right here and this can look a little intimidating at first but it's fairly straightforward and um it starts out their data at best goes back to 1972 but that's still great right that's almost 50 years of data uh you can start with whatever initial investment you want i'm going to keep it at ten thousand dollars now the other thing you can do is add cash flows so in other words are you just investing a lump sum at the beginning of this period and nothing else or are you going to contribute money over time i always like to include contributing money over time and this is important the reason i do is because that's how we invest right at least it's how i invest i don't i don't think most of us graduate from high school or college stick whatever 50 grand in in an investment and then never add another dollar to it right that's just not how people invest so i don't know the the amount of the contributions is all that important i try to keep it somewhat realistic so i'll just say 500. we'll ingest it for inflation sure and we'll contribute that monthly again the 500 isn't that all that important uh it's just a matter of trying to get something that's you know reasonable we're going to rebalance annually but you have other options here we'll do it annually we could you know have a benchmark but i think given the portfolio we're going to put in here we don't really need one because it's basically an s p 500 index so how do we create the portfolio well we can select asset classes here so a um s p i don't think they actually have what they call an s p no but it would be u.s large cap right and that's going to be 90 and uh and then for fixed income we want us government short term so fixed income here we go short term treasury all right treasury by the way for those new to investing is what they call basically us government bonds treasury bonds right or bills bills would be short term technically and bonds would be longer term but in any event uh 10 there we are now we could compare this to some other portfolios and and that's certainly a good thing to do but i think in our case we just want to see how this portfolio does for the moment so then we just analyze the portfolio and all we've done this the screen we're at is still here we're still on the same page it just drops us down to the results now the one thing i want to notice but note is that we put in here 1972 but when we look at the results it's actually starting in 77 this explains why right here uh because of one of the uh asset classes we picked and i'm going to guess it's the the the short term treasury i think but in any event the site just doesn't have data going back to 72 so they give us as much range as they have data for and it just happens to be january 1977 still obviously you know over 40 years 40 what four years of data so not bad huh all right so this gives us sort of the data we can see our 10 000 plus 500 a month uh investment adjusted for inflation grew to just a small little balance here of 10 million 200 000 thank you compounding uh if that doesn't get you to want to start investing today i honestly i don't know what else would compound annual growth rate may surprise you if you think about the s p 500 you think well wait a minute rob hasn't it like returned 10 or 11 depending on your time period what's this 17 percent it it's because we're contributing on a monthly basis right and that effect that will affect the compound annual growth rate and i think like i said this is i think more realistic if we took this out if we said let's not contribute right we're just going to a lump sum 10 grand how do we do it will bring down the compound annual growth rate uh substantially right because it's just a lump sum at the beginning of this long time period when you contribute monthly every little investment little i mean 500 isn't little but relatively speaking is going to affect the returns based on what the market was doing that month because you're going to be investing in good times but you're also going to be investing in the middle of the 1987 crash the dot-com bubble burst the financial crisis and 0-8 you know and so on so it does affect the compound annual growth rate uh pretty significantly and uh i'll go back real quick and we'll uh we'll go ahead and contribute there we go bring us back to our original portfolio just for comparison purposes it gives you some other i think useful data the best year the worst year the max draw down right and they actually tell you if you hover over the little little i icon there draw down period based on monthly returns is november 07 to february 09. now remember in this hypothetical we're still dutifully investing our 500 every month and we're rebalancing every year and we're not taking our money out of the market that's important we go back to buffett's letter he talks about that the win right and he says the antidote to the kind of missed timing is for an investor to basically invest and stick with it never to sell when news is bad and stocks are well off their highs stocks were bad right here and they were well off their highs and i have good friends who sold and they tell me today with profound regret that it was one of the biggest investing mistakes they'd ever made so warren buffett's portfolio works uh it it it is i i won't say that it's necessarily the best portfolio for everyone you know i've talked in the past about the three fund portfolio the forefront portfolio and so on i think all of these are good reasonable ways to invest i think warren buffett would agree if i can pretend to speak for him because remember i don't think his point was so much boy you've got to have this specific portfolio and all others are bad he was comparing that low-cost index fund portfolio to using high-cost advisors high-cost investment advisors high-cost mutual funds ridiculous high cost hedge funds you may watch the show billions and it may be entertaining but it's not the way you should invest that was warren buffett's point now i want to go and talk about one what two other things really about the warren buffett portfolio and give you some things to think about and some resources to check out because one question would be well you know what if i'm getting near retirement does that portfolio make sense 90 stocks 10 bond seems awfully rich that may be fine for warren buffett's wife who's probably going to inherit i would think billions but if not hundreds of millions you know we're probably not dealing with quite as much money well it's interesting some folks have already started to answer that question is the 9010 portfolio a good retirement portfolio now i will tell you for me personally i would not follow it it's just a little too rich for me i'm currently i guess i'm not technically retired but i'm moving in that direction i'm at an 80 20. i kind of think i'll end up somewhere around 70 30 when i'm truly completely retired however i like to keep an open mind so there's some research i want to show you by a professor and he's from spain and it does a lot of research on investing drawdowns and retirement portfolios in retirement okay enough chit chat let me show you the article here it is and i will uh again leave a link to this uh in in the uh below the video uh javier estrada is the professor you can see him here and uh he basically examined the the buffett's asset allocation and he examined it from the perspective of a retiree which i thought was kind of interesting to do and uh you could of course read the article for yourself if you want to but basically he said you know yeah actually this this works out pretty good uh it has pretty good results and uh i won't dive into great detail on the article it's only six pages long this was this was you know it's a very easy read but what i want to show you is is a couple of things i'm going to scroll down to this first chart which is here this exhibit 1. um what he did was he looked at different asset allocations using warren buffett's two funds the s p 500 and the uh the short-term government bonds and he looked at portfolios ranging from as you can see here uh 100 um stocks all the way down to 30 stocks 70 bonds he looked at i think it's 86 different retirement scenarios annually rolling periods beginning in 1900 yeah here it is 86. and so what he found was this is the failure rate so of of those 86 retirement scenarios three and a half percent failed meaning you ran out of money before 30 years in this portfolio the only one that had no failure rate interestingly is the 60 40 portfolio but all of these did reasonably well except when you got really low on equities and then the failure rate jumps the other thing that's interesting is the mean the mean and median and what this shows is how much was left over at the end of the 30 years in his analysis he just assumed a thousand dollar portfolio and used the four percent rule so he's taking out 4 000 or excuse me for 40 dollars in year one and then adjusting for inflation and you know what's interesting and i think this is something for folks to consider that are in or near retirement the 60 40 portfolio may have had a zero failure rate but what it left you with was significantly less than these richer portfolios so when you're in retirement certainly the failure rate is critical you can you really want to focus on that for sure but you know a lot of folks are also wanting to leave money to their loved ones and that's an important objective during retirement as well and if if that's you and you're considering it you know this data can be i think really useful and i want to show you one more before we move on he did i'll show you the chart first it's right here we're going to come back to it but he suggested two sort of twists that's what he calls them t1 and t2 to the warren buffett portfolio as applied to retirement and twist one said and by the way this gets to the idea of dynamic withdrawal strategies remember the four percent rule uh just took out four percent year one and then adjusted it for inflation every year going forward regardless of what was going on in the market regardless of your portfolio value regardless of inflation what this professor did he said well let's just kind of kind of tinker with that a little bit what if we do this what if if stocks have gone up you can see right here if stocks have gone up the retirees will take their withdrawal from stocks and then rebalance the portfolio back to 9010 however if stocks have gone down that year retirees will take their withdrawal from bonds and they won't they won't rebalance right so that was sort of twist number one t1 twist two was similar but rather than comparing stocks to the market and did they go down or not they actually com he actually compares the stock return to the bond return and what he said here for t2 was if the return of stocks is higher than the bonds which you would expect to be the case most of the time take your your withdrawal whatever that is from from from stocks and then rebalance however if bonds have outperformed stocks retirees will take the withdrawal from bonds and not rebalance the portfolio now i don't want to suggest that these are the best or even good ways to think about retirement income strategies these were two that he examined interesting i think and um here are the results what he did was he said okay what's the failure rate it's kind of fascinating to me it didn't change 2.3 of course the 60 40 is still zero but but these are you know this is 2.3 percent out of 86 retirement scenarios that he looked at so still i mean i would call that a success um so you know the reality is if you're in retirement you're going to be adjusting your withdrawals if things get really bad in the economy and with your market i don't care what you know retirement spending strategy you follow so i think it's actually unlikely that someone's going to actually run out of money but still useful information but what i found also interesting is the mean and median of these two actually outperforms the 9010 which i found fascinating obviously they all outperformed the 6040. we kind of already knew that so there you go that's kind of an interesting take on the warren buffett portfolio as applied to retirees again i'll leave a link in the um in the below the video so you can check out that uh that study if it's of interest to you now one last thing uh i will create the warren buffett portfolio in m1 finance and leave a link to it below the video you ca of course you can use it just by clicking a couple of buttons if you invested in one finance or you want to invest in m1 finance but even if you don't you can just check it out real quick and uh you can see the funds that that i would would recommend if you wanted to follow this approach they're both vanguard etfs and i will in a future video actually walk through how to create what they call pies basically a portfolio an m1 finance i'm going to do that as part of reinvesting all of the credit card rewards that we've accumulated over the last several a couple of years our our balance now is up to about 20 or 21 000 that's a an investment portfolio built entirely on the credit card rewards that we've received uh over the last couple of years it's kind of my way of showing i don't know maybe a a clever or unique way to save a little extra money but also the power of compounding how even relatively small amounts of money over time invested wisely can turn into you know big piles of cash so i'll show you that in an upcoming video shortly but wanted to show you the warren buffett portfolio today if you have any questions leave them in the comments below i'll help you out any way i can and until next time remember the best thing money can buy is financial freedom

Channel: Rob Berger

Views: 45,267

Rating: 4.9198718 out of 5

Keywords: warren buffett, berkshire hathaway, warren buffett portfolio, warren buffett investment, warren buffett portfolio 2021, warren buffett portfolio strategy, warren buffet, warren buffett investment strategy, warren buffett index funds, warren buffett stock portfolio, warren buffett investment advice, warren buffett investment strategy index funds

Id: VYr1qjrFgsc

Length: 22min 39sec (1359 seconds)

Published: Wed Mar 31 2021