How to Build a Warren Buffett Portfolio

Warren Buffett is recognized as the greatest investor of all-time because of his discipline and conservative approach to investing.

Instead of focusing on the short term, Warren Buffett focuses on the long term. He also has a low appetite for risk, buying companies that active traders would find boring beyond all belief.

Buffett once described his investment style as, “I’m 85% Benjamin Graham.” (Benjamin Graham is known as the godfather of value investing. His book, The Intelligent Investor, is respected as a classic on Wall Street. See also, 20 Must Read Investing Books).

Just look at Warren Buffett’s company Berkshire Hathaway’s (BRKA) stock price appreciation over the past 20 years. And yes, you are reading that correct, the stock currently trades for over $260,000… per share.

Berkshire currently holds a market cap of approximately $430 billion, making Warren Buffett the third richest person on the planet.

To dive deeper and fully appreciate Warren Buffett, I recommend reading his annual shareholder letters alongside the book, Buffett: The Making of an American Capitalist.

This post will focus on how to build a simple Warren Buffett portfolio, so let’s get to it.

Portfolio Benefits

There are five key benefits of constructing a Warren Buffett portfolio:

  1. You can sleep well knowing you are following the advice of the greatest investor of all-time, Warren Buffett.
  2. By buying and holding for decades while reinvesting dividends, the power of compounded returns is realized.
  3. With passive indexing in low cost index funds, you are keeping fees as low as humanly possible which maximizes returns.
  4. You are maximizing tax efficiency by buying and holding for decades instead of days (only relevant when investing in a personal portfolio versus a retirement account).
  5. The portfolio is easy to implement and straight-forward to follow.

Warren Buffett Portfolio Holdings

Warren Buffett’s recommended portfolio is actually extremely simple. In fact, there are only two holdings: the S&P 500 and a short-term US government bonds fund. Depending on how young you are when you start investing, it may just be the S&P 500 (more on allocation below).

What are the symbols for these two Vanguard funds? You can buy an ETF version or a mutual fund version. I personally use the ETF version, but either one works.

  1. S&P 500 index fund – ETF symbol VOO (no minimum), Mutual Fund symbols VFIAX($10,000 minimum), VFINX ($3,000 minimum)
  2. Short-term government bonds fund – VFIRX ($10,000 minimum), VFISX ($3,000 minimum). For an ETF, consider VGSH.

Buffett, 85 years young, revealed his simple portfolio mentality in his 2013 annual letter to company shareholders (emphasis mine),

My advice to the trustee couldn’t 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.) 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.

Buffett provided similar advice after Lebron James asked him what he should do with his own investments,

“Through the rest of his career and beyond, in terms of earning power, [he should] just make monthly investments in the low-cost index fund,”

lebron warren

The reason Buffett recommends Vanguard funds over other providers is because the funds have the lowest costs respectively for the instruments they are designed to follow.

For example, VOO and VFIAX have a yearly expense ratio of just 0.05% (VFINX, with its lower minimum, charges 0.17%). For every $10,000 invested, .05% is a whopping $5 per year in management fees.

Here’s a Buffett quote on low costs and keeping investing simple,

Both individuals and institutions will constantly be urged to be active by those who profit from giving advice or effecting transactions. The resulting frictional costs can be huge and, for investors in aggregate, devoid of benefit. So ignore the chatter, keep your costs minimal, and invest in stocks as you would in a farm.

What is the S&P 500?

The S&P 500 is the most widely followed index in the world. From Wikipedia,

The Standard & Poor’s 500, often abbreviated as the S&P 500, or just “the S&P”, is an American stock market index based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ. The S&P 500 index components and their weightings are determined by S&P Dow Jones Indices.

If you want to invest in the United States as a whole, the easiest way to do it is to buy a fund that replicates the S&P 500.

In fact, both Warren Buffett and Jack Bogle (founder of indexing and Vanguard) believe the S&P 500 is all you need to have a worldwide exposure. This is because the S&P 500 generates just over 50% of its revenues domestically. The rest comes from overseas.

SP 500 company sales worldwide 082715

Best Broker for Following Warren Buffett

Which online stock broker should you use to build your Warren Buffett portfolio? The answer is simple. It doesn’t really matter which broker you use.

Since you are investing for the long haul and will be accumulating a large stake over many years, broker trade commissions will quickly become negligible, even if buying shares every month as Buffett recommends.

The biggest advantage of a Warren Buffett portfolio is what we discussed earlier, the super low costs. Remember, for every $10,000 invested in Vanguard’s S&P 500 ETF VOO or mutual fund VFIAX, .05% is a whopping $5 per year in management fees.

Whichever broker you choose, reinvesting the dividends through a DRIP (dividend reinvestment plan) should be a free option (meaning the online broker will not charge you to automatically reinvest the dividends and buy more shares).

If you want to automatically make monthly deposits and have your account automatically buy shares, Capital One Investing is a good broker to consider.

One final option, go direct to the fund source and use Vanguard.

Consider a Robo-Advisor for Automatic Investments

Perhaps you want to follow Warren Buffett’s core principals of taking a long term approach, keeping it simple, reducing fees, and embracing passive indexing, but don’t want to actually place the trades yourself.

If this is you, then you will want to consider using a robo-advisor instead of trading on your own. For more on robo-advisors and automated investing, read this guide.

Traditional Asset Allocation by Age

While Warren Buffett favors holding a simple 90/10 portfolio of the S&P 500 (stocks) and short-term treasuries (bonds), this is not what a traditional advisor will recommend.

To determine a traditional portfolio that is “properly diversified”, you first want to look at your age and target retirement date. For this section I am referencing the largest asset manager in the world, Vanguard, which has a staggering $4 trillion under management.

When you’re young, it is recommended to take more risk and invest more heavily in stocks vs bonds to maximize returns. As you age, you then want to increase your bond holdings while reducing your stock holdings to lower risk. After all, you are getting ready to retire.

Here’s a good cheat sheet from Vanguard on the different allocations and historical returns. (IMPORTANT: The bond returns used below are a mix of every duration whereas Warren Buffett uses short-term treasuries. This is similarly true with the stock returns. Thus, the returns estimations are NOT a true 1:1 representation of Warren Buffett portfolio.)

Vanguard allocation

To determine allocation based on age alone, Vanguard recommends starting with a 90/10 (stocks/bonds) mix and maintaining it until you are 20 – 25 years from your desired retirement age. From there, you slowly adjust your allocation every few years until you reach retirement in which you ideally would be allocated 40/60 (stocks/bonds).

For example, if your target retirement age is 65 and you are 30 like me, then you would theoretically want a 90/10 mix. Once you turn 40, you could reduce to say 80/20, or wait a few years to start transitioning. At age 60, you’d want to be around 60/40 or 50/50.

Formulas aside, Warren Buffett made it clear that for his estate he has instructed a 90% S&P 500 / 10% short-term gov bonds mix allocation. This would be counter-intuitive to the above formulas and breakdowns of proper allocation, but that’s Warren Buffett for you.

In the end, your plan for retirement has to be unique to YOU. Your ideal allocation mix may not fit into a broad, simplistic mold.

There are a slew of factors that come into play: your current income, current savings rate, target retirement age, and personal goals for retirement to name four big ones.

I am not a professional advisor, nor do I have any interest in becoming one. That said, hopefully the above can at least help to provide a simple guide to use as a starting point.

Target Date Funds are Another Winner

If you want to invest in a traditionally diversified portfolio by age, the easiest solution is to buy a Target Date Fund (TDF).

With a target date fund (Vanguard calls them target retirement funds), you simply buy one low-cost mutual fund and everything portfolio related is done for you automatically through the years.

Vanguard has a fantastic free tool to determine what fund you need to buy based on your current age and desired retirement age.

Since I am 30, Vanguard’s tool recommended I buy the Vanguard Target Retirement 2050 Fund (VFIFX) which charges an annual expense ratio of only 0.16%.

In my 401k portfolio held with our company (so pre-tax retirement money, not my personal post-tax investment portfolio), this is the only fund that I hold. I automatically invest 5% of my paycheck each month (which our company matches 100%) and it automatically buys this fund.

The bottom line is that Target Date Funds are a fantastic solution as well for those who want to simply set it and forget it.

Warren Buffett’s Bet Against Wall Street

Warren believes so strongly in the simplicity of buying the S&P 500 that he bet a handful of hedge funds $1,000,000 that they couldn’t outperform a low cost index fund over a 10 year period. Winner gets a donation to the charity of their choosing.

Warren Buffett chose the Vanguard 500 Index Fund Admiral Shares (VFIAX) for his single position. The competition Protege Partners, a New York City money management firm, selected five unnamed funds of hedge funds.

The bet was kicked off in 2008 and as of early 2017 Warren Buffett’s bet was crushing the competition with a 85.4% return vs a 22% return for the hedge funds.

For the full story, NPR’s Planet Money podcast did a great episode on the bet which also covers the benefits of passive, low-cost indexing which I’ve touched on in this post.

planet money brilliant vs boring

Alongside the above podcast episode, I also highly recommend Barry Ritholtz’s Masters in Business interview with Jack Bogle (founder of Vanguard, indexing).

Closing Notes

Warren Buffett likes to buy companies that have stood the test of time, have fantastic managers, wide moats around their core businesses, and will be around for decades to come.

Building a Warren Buffett portfolio is a lot easier than many people think because the best representation of Buffett’s core beliefs falls under the S&P 500.

Buffett also believes in keeping costs as low as possible by consistently buying each month no matter what the market environment and then holding for decades. Also known as passive indexing, the other key is selecting funds with the lowest expense ratios, which is why Buffett recommends Vanguard.

All in all, you can choose any broker to build a Warren Buffett portfolio and follow the advice of greatest investor on earth. Awesome.