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The Warren Buffet passive portfolio

Warren Buffet: One of the world’s richest men, perhaps its greatest living investor, a global philanthropist, sage, paragon of modesty, and a damn fine letter writer to boot. If I had my way this guy would be on posters on every street corner as the West’s answer to North Korea’s Dear Leader.

To cap it all, Buffet loves passive investing, as previously noted by The Investor.

So much so that his instructions for his legacy to his wife are to invest the bulk of the money in index funds:

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.

Talk about keeping it simple!

Warren Buffet's passive portfolio

So how would you translate Buffett’s advice into a passive portfolio that UK investors could buy?

Like this:

Asset class Fund Allocation (%)
Equities Vanguard US Equity Index Fund 90
Short-term government bonds Vanguard US Government Bond Index Fund 10

The US Government Bond fund is hedged to Sterling. 66% of its securities count as short-term.

Of course that’s all well and good for someone who lives in America, or plans to emigrate.

A UK homebody version would look like this:

Asset class Fund Allocation (%)
Equities Vanguard FTSE UK Equity Index Fund 90
Short-term government bonds (gilts) SPDR Barclays Capital 1-5 Year Gilt ETF 10

Note: See our cheap tracker guide.

The snag is that the UK equity market isn’t as large or as diversified as the US.

Britishers are well advised to go global:

Asset class Fund Allocation (%)
Equities Vanguard FTSE All-World ETF 90
Short-term government bonds (gilts) SPDR Barclays Capital 1-5 Year Gilt ETF 10

Note: See our cheap tracker guide.

That’s a very simple portfolio that’s poised to take advantage of the march of global capitalism.

Over the long run you should benefit from the high expected returns of equities. Yet you must be prepared to endure the trauma of heavy losses along the way when you devote 90% to a risky asset.

A passive investing champion like Larry Swedroe would generally only recommend a 90% equity allocation if 15 years or more of investing lies ahead of you.

Over that kind of longer time horizon, equity returns are more likely (but not certain) to average out to something that resembles their historical record.

Asset allocation decisions

My guess is that the Buffet passive portfolio can afford to invest 90% in risky equities because Mrs Buffet will not rely upon the stock market portion for her essential living expenses.

The chances are that the bequest is big enough to cater for the basics purely from the government bond portion.

If that’s the case then the portfolio’s asset allocation reflects the fact that you can take more risk on the equity side – in the hope of better returns – as long as you’re not banking on those returns to enable you to live.

If you don’t need the money soon, or you have other options – such as property to sell, a reliable income from other sources, or the ability to get another job – then you can afford to take more risk, too.

In that instance, your age doesn’t matter, although your risk tolerance does.

The less you can afford to lose or the fewer options you have or the sooner you’ll need the money, the more you should ramp up your bond allocation.

Risk free return or return free risk?

Warren Buffet is as sceptical as anyone about the prospects for bonds but plainly he knows that short-term government bonds are a good source of liquidity.

Short-term government bonds:

  • Are unlikely to default (in the case of UK and US bonds).
  • Perform well during turbulent market conditions.
  • Do okay against inflation or rising interest rates (when in a fund) as they mature quickly and are reinvested at a better rate.
  • Are low volatility (in other words, you’re extremely unlikely to find the value of your bonds halves just when you need the money).

Short-term government bonds generally offer stability and low growth and are the bungee in your portfolio that slows its decline in value when equities plunge. They can protect a portion of your nest egg when you need to crack it open, meaning that bonds are still worthy of a place in most portfolios, despite ongoing nervousness about interest rates.

Whether the exact detail of Buffet’s passive portfolio is for you is beside the point. It’s the underlying principle that counts: If passive investing is good enough for his nearest and dearest then it’s probably good enough for the rest of us.

Take it steady,

The Accumulator

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{ 21 comments… add one }
  • 1 Neverland March 11, 2014, 10:39 am

    Investing doesn’t have to be complex

    Tax and financial intermediary theivery make it complex

  • 2 dearieme March 11, 2014, 11:50 am

    What’s the point of getting rich if you sit around drinking coke? Madness.

  • 3 dearieme March 11, 2014, 11:56 am

    On the subject of Mrs B: why buy equities at all? If you don’t need the extra return, why take the extra risk? Why not an international mixture of fixed rate and index-linked government bonds? Canada, Sweden, Switzerland, Norway, Singapore ….. To be fair, I don’t know how old Mrs B is, but I’m guessing she’s no spring chicken. Perhaps she should even buy an annuity or two.

  • 4 Paul S March 11, 2014, 5:52 pm

    Warren B has previously made the point that he considers bonds to be riskier than equities over any significant timescale. He treats short-term bonds as a cash substitute. As Mrs B is 68 I would think he is planning for the next 10-30 years. He doesn’t confuse risk with volatility.

  • 5 Andy March 11, 2014, 7:51 pm

    Could you use a cash ISA instead of short term bonds for the same purpose?

  • 6 gadgetmind March 11, 2014, 8:28 pm

    Cash is an option and Tim Hale goes as far as to say that a tracker and some NS&I linkers are a reasonable portfolio. However, even inflation linkers currently have negative yields so cash isn’t too bad. However, gilts tend to be negatively correlated with equities whereas cash is uncorrelated. Oh, and annual ISA contribution limits mean that rebalancing is only possible for modest portfolios.

  • 7 NaeClue March 11, 2014, 9:28 pm

    “Tax and financial intermediary theivery make it complex”

    Very true. We spend time optimising what is held in SIPPs, ISAs and outside tax shelters, make sure we use our CGT allowances (and try not to go over), then along comes inheritance tax, or a chancellor moves the goalposts.

    Perhaps being rich means you don’t need to worry about taxes, can ignore all this and just invest in a 90/10 fund?

  • 8 The Accumulator March 11, 2014, 9:40 pm

    @ Dearieme – there’s no risk if you’re not a forced seller. If you use a floor and upside plan: http://monevator.com/secure-retirement-income/
    then essential needs are taken care of by the low volatility asset. Because your standard of living doesn’t rely on the equities you need never sell them when they are depressed. You can afford to wait until they recover and then enjoy the upside. Whether that be spent on extra burgers and coke for the grandkids or a larger legacy or charitable donations etc.

  • 9 The Investor March 11, 2014, 10:31 pm

    @Andy — I would be happy doing that myself, and indeed cash instead of bonds has been my approach over the past few years (bundled up with NS&I certificates, Zopa, strange preference shares etc).

    However I don’t intend to be greedy… I’ll probably begin the very gradual rebuild of what will be modest gilt position at even 3% on the 10-year. Not holding any of the safest non-cash asset for UK investors is a risk, no doubt, that’s only been made palatable by the terrible rewards we’ve been offered for doing so for the past 5 years.

  • 10 Ignorant March 12, 2014, 10:01 am

    Warren Buffet like many rich men has married a younger woman second time round.
    Although not young at about 68 years of age and rich she probably has a few booms and busts in front of her and may well live another 20+ years.

  • 11 Leonard @ The Wallet Doctor March 12, 2014, 7:32 pm

    Many people get overwhelmed by investing because they perceive it must be an incredibly complicated process. It can be complex but it need not be. Thanks for the clear breakdown.

  • 12 Ben March 13, 2014, 1:52 am

    Why the vanguard ftse equity etf and not the vanguard life strategy 100 that is recommended elsewhere on the site?

  • 13 The Accumulator March 13, 2014, 9:35 am

    @ Ben – you could easily substitute Vanguard Life Strategy 100 for the All World ETF. There is little practicable difference for the purposes of this portfolio.

  • 14 agranny March 19, 2014, 5:24 pm

    Would the short term government bonds keep up with inflation? Would an index-linked gilt tracker be safer?

  • 15 The Accumulator March 20, 2014, 9:18 am

    @ agranny – short term gov bonds will do OK against inflation over time because you can reinvest maturing bonds relatively quickly at higher interest rates. Index-linked gilts are better against inflation but a linker tracker fund is likely to be more volatile as durations are generally longer in the products available to UK investors.

    Don’t forget that in the Buffet portfolio discussed above the equities offer good long-term inflation protection too.

  • 16 Bob April 12, 2015, 11:01 am

    Why not Vanguard’s US Equity Index Fund for UK investors? Is it more expensive compared to Vanguard FTSE UK Equity Index Fund or is there anything else which would make it complicated?

  • 17 The Accumulator April 12, 2015, 4:41 pm

    @ Bob – if you’re a retiree (or nearing retirement) then you may wish to avoid currency risk by investing in the UK i.e. by investing in assets of the same currency as your liabilities.

    If you accept currency risk then why concentrate in the US when you can just as easily buy a fund diversified across the entire world?

  • 18 Patrick May 3, 2016, 2:27 pm

    For the purposes of platform fee-free investing Vanguard doesn’t seem to offer a UK S&P 500 tracker (ignoring the ETF). Does Buffett’s advice apply to the Vanguard U.S. Equity Index Fund? He seems to emphasise the S&P 500.

  • 19 The Accumulator May 4, 2016, 7:17 am

    The S&P 500 is generally thought of as a proxy for the US market. It would be a fine hair to split that only the S&P 500 would do, given nobody knows how the future will turn out and there’s no particular reason to think the S&P 500 will outperform a broader take on the US. If you’re worried about it or would rather put your faith in US large caps than a more diversified index then have a look for non-Vanguard trackers that track the S&P 500. For example: https://www.spdrseurope.com/product/fund.seam?ticker=SPY5%20GY&

  • 20 Brooke Rutherford January 17, 2018, 7:08 pm

    I’m having a hard time finding an investment platform that allows me to invest in VFINX. I’m starting to realise that it might not be available to UK customers (as it’s not even available on vanguard.co.uk as an option). Why is that? Comparing VFINX to VUSA is, frankly, no comparison (21% to 9% YTD returns respectively). Am I missing something here? Seems unfortunate that we can’t access any of the top S&P index funds. Any advice for a newbie like me would be appreciate. Thanks! P.S. Love your blog and your matrix on investment platforms. It has single-handedly helped me over the biggest hurdle to investing so far (that is, figuring out how to buy!).

  • 21 The Accumulator January 17, 2018, 9:06 pm

    Hi Brooke, I’m glad the blog has been helpful. VFINX is a US regulated ETF available to US investors. You could buy into it but you don’t need to. It tracks the S&P 500. So does VUSA – the equivalent for UK investors. That makes them essentially the same thing. The difference in numbers may well be down to exchange rates – returns reported in dollars vs returns in pounds. The differences in returns between ETFs that track the same index are usually miniscule. Even 1 percent difference is huge and quite likely because you’re metrics aren’t like for like. Finally return figures of less than 5 years are mostly just noise – there’s nothing meaningful to be gained from them.

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