The Mrs. Buffett Portfolio: Why We Wouldn’t Recommend It For Most Clients

Warren Buffett’s aggressive investment plan is one that would make most investors wince. I’ll explain why.

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If you’re not familiar with Warren Buffett, you probably should be. He’s the 85-year-old investor who turned a failing manufacturer of suit liners (Berkshire Hathaway) into one of the largest companies in America. He accomplished this by investing Berkshire’s cash into a variety of great businesses, ranging from Coca-Cola to Disney to GEICO. His long, impressive, and very public investment track record is virtually unmatched in history. What’s also impressive is the fact that someone with such tremendous investment and business acumen is so willing to share his common sense knowledge and philosophies in a folksy and approachable manner through his shareholder letters, interviews, and the occasional editorial piece. Because of his investment track record he has amassed one of the largest fortunes in the world with a net worth estimated at $66.7 billion according to Forbes.

In his 2013 letter to Berkshire Hathaway shareholders, he offers a glimpse into how his money is to be invested after he dies. He’s committed to giving the majority of his wealth to the Bill and Melinda Gates Foundation during and after his life, but will still be providing a substantial, yet undisclosed sum in trust to his wife, Astrid Buffett. He said:

“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.) 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.”

While betting against Mr. Buffett has rarely been a successful trade, we would be hesitant to provide that same recommendation to most of our clients.

There are two areas he mentions here that are interesting. First is what most people would consider a fairly aggressive stance on asset allocation (your mix of stocks and bonds), and second he can barely resist taking a jab at high cost funds and expensive managers. He’s likely referring to hedge funds that usually charge their investors 1-2% a year plus up to 20% of any profits. Reducing the cost of your investments is incredibly important in the long run and something that we are constantly pursuing for our clients.

In regard to the asset allocation, having 90% of your money in the great companies of America has historically been an extremely successful strategy… over the long term. If you have the ability to wait through any bear markets, and not change your strategy when the stock market goes down 50%, this could potentially be a very successful long term plan.

If you can draw down the portfolio equally from the stocks and the bonds when times are good, and live off of just the 10% in government bonds during bear markets, this might be a good strategy. For most people with a $1 million nest egg, 10% of that or $100,000 might not last as long as the bear market does (say three years for a bad one).

One thing to keep in mind, is that Mrs. Buffett could very likely be receiving in excess of $100 million. Therefore, the 10% allocation to bonds will likely be in excess of $10 million. It’s probably safe to say that she can live off of the $10 million for as long as it would take for stocks to rebound (It’s worth noting here that in addition to his folksy charm, Mr. Buffett and his family are also well known for their thrifty spending habits).

Most people are not able to tolerate the volatility of a portfolio that’s 90% stocks. If your sole goal was just to make the highest rate of return, you should have as high an exposure to stocks as you can tolerate. For most of us though, we should be building portfolios that match stocks and bonds together in a way that limits the volatility of the portfolio and provides us with the opportunity to rebalance into stocks at lower prices when they inevitably decline from time to time.

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