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Listening to Warren Buffett’s interviews and exploring his writings gives you an abridged introduction to best investing practices. And while Buffett often delivers conceptual nuggets of investment wisdom, he doesn’t hold back on specific, actionable takeaways. For example, in a letter from 2013 to Berkshire Hathaway shareholders, Buffett provided the exact portfolio allocations set out in his will. And guess what? This wallet is very simple. If you have a brokerage account and know how to request a trade, you can emulate Buffett’s plan today.
All you have to do is put 10% of your money in short-term treasury securities and the rest in low cost securities. S&P 500 index fund.
Image source: Getty Images.
Government bonds for stability
In this two-position portfolio, government bonds provide stability and liquidity. If you need cash when you don’t want to sell your stocks, there is always a market for US government securities. This role is important enough that you can accept the trade-off between very low returns (less than 1%).
“Short term” means maturities of less than five years. You can choose from TIPS, which offer protection against inflation, or standard treasury bills. Both are available for purchase from TreasuryDirect or through an ETF or mutual fund, such as the Vanguard Inflation-Protected Short-Term ETFs (NASDAQ: VTIP) or the Schwab Short Term US Treasury ETF (NEW: SCHO).
S&P 500 stocks for growth
Your larger position in the S&P 500 should generate an appreciation in the share price as well as dividend income. An investment in the S&P 500 offers you diversification among hundreds of mature and financially capable companies. Specifically, these are 500 of the largest state-owned companies in the United States. Together, they account for around 80% of the stock market’s value and largely determine the behavior of the market as a whole.
You can invest in S&P 500 companies individually, but most investors will take Buffett’s advice and buy a low-cost index fund instead. The low cost means the fund has efficient operating expenses, allowing more of the return on investment to flow to shareholders.
Two funds corresponding to this description are the SPDR S&P 500 ETF Portfolio (NYSEMKT: SPLG) and the IShares Core S&P 500 ETF (NYSEMKT: IVV). Another choice is the Vanguard S&P 500 ETF (NYSEMKT: FLIGHT), which was Buffett’s choice in 2013.
The adjustments you can make
Even Buffett’s wallet isn’t perfect for every situation. Holding 90% of your wealth in equities can generate good growth over time, but that comes with the risk of high volatility in the short term. You will need to change this strategy if it does not match your risk tolerance, which should be in part based on your age. If you’re retired or nearing retirement, or just don’t like surprises, you’ll prefer more stability than this portfolio offers.
The solution here is simple: keep less money in the S&P 500 fund and transfer more to your bond fund. A 50/50 split would be very safe, while a 70/30 would be moderately risky.
You would also change Buffett’s approach if you don’t intend to be a first-time investor forever. In this case, you could devote, say, 10% of your portfolio to stocks of your own choosing. You can follow the two-wallet model in your 401 (k), for example, but then save a smaller amount each month in a brokerage account that has access to the full range of exchange-traded securities. You can then develop and refine your own investment approach, without risking most of your wealth.
Find your balance
The big advantage of the Buffett portfolio may not be the exact allocations, but rather the idea that you can balance risk and stability with just two positions, as long as they behave differently. Look at your investment goals and timeline to identify the break-even level that’s right for you.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.
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