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Two-Fund Portfolio

Warren Buffett’s Two-Fund Portfolio

Warren Buffett’s Two-Fund Portfolio. I have been writing articles about retirement plan portfolios. For retirement plans, I think most people should follow the KISS principle. Following the KISS principle entails keeping your costs low, following a passive index fund strategy, and maximizing your contributions as much as you can. The first two criteria are easy, and the third one is a bit harder, depending on your weekly expenses and budget. But as your income grows, it is only a matter of time before you hit the maximum contribution level. So why follow the above three criteria for your retirement portfolios? Well, they work overtime.

To date, I have covered three potential retirement portfolios. The first was the core and satellite or core and explore retirement portfolio by Schwab. The second was the Coffeehouse Investor Portfolio by Bill Schultheis. The third was the Bogleheads 3-Fund Portfolio advocated by Taylor Livermore and the Bogleheads. Read those articles if you want some insight into other retirement portfolios.

Two-Fund Portfolio
Warren Buffett’s Two-Fund Portfolio

What Does Warren Buffett Say?

What does Warren Buffett say about retirement portfolios? He does talk about it in a certain sense, although he does not explicitly say to invest in a specific manner for retirement. We must go back to 2013 and his annual letter to find out. Below is the quote from his 2013 annual letter where Warren Buffett talks about his two-fund portfolio.

My money, I should add, is where my mouth is: What I advise here is essentially identical to certain instructions I’ve laid out in my will. One bequest provides that cash will be delivered to a trustee for my wife’s benefit. (I have to use cash for individual bequests because all of my Berkshire shares will be fully distributed to certain philanthropic organizations over the ten years following the closing of my estate.) 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.

Warren Buffett’s Two-Fund Portfolio

Warren Buffett’s two-fund portfolio comes down to a straightforward combination of 90:10 asset allocation for an S&P 500 index fund and short-term government bonds. Short-term government bonds are 1-to-3-month US Treasury bills and are treated by some as risk-free. Notably, this two-fund portfolio does not include an international fund or intermediate bonds. However, this fact is not surprising since Warren Buffett focuses on the American economy. Furthermore, most of the stocks in the S&P 500 have relatively large international sales. For example, a recent article stated that approximately 29% of sales are from overseas.

This portfolio is concentrated in US equities. Hence, it may be perceived as risky and not diversified. From Buffett’s perspective, short-term bonds are probably a place to park cash. In addition, short-term bonds are a haven during times of economic duress or market corrections. But 10% in short-term bonds is not much diversification. However, recent research illustrates that it only has a 2.3% failure rate using the 4% withdrawal rule and 30 years. Thus, Warren Buffett’s two-fund portfolio may not be as risky as perceived; more on that below.

Performance and Risk of Warren Buffett’s Two-Fund Portfolio

What is the performance and risk of Warren Buffett’s two-fund portfolio? We will examine this over 20 years, from January 2000 to August 2021. In this comparison, we compare Vanguard 500 Index Investor (VFINX) and Vanguard Short-Term Bond Index (VBISX) in 90%/10% as portfolio 1, 100% VFINX in portfolio 2, and Vanguard Total Stock Market Index (VITSX) and Vanguard Total Bond Market Index (VBFMX) in 60%/40% in portfolio 3. We assume the portfolios are rebalanced annually. We focus on the compound annual growth rate (CAGR), standard deviation, and max drawdown numbers. 

Warren Buffett Two-Fund Portfolio Returns
Source: Portfolio Visualizer

Clearly, portfolio 2 (100% S&P 500) is the most volatile, has the greatest max drawdown, and has the best year by a decent margin. However, the improvement in CAGR is only 0.20% better than the portfolio 1 (90% / 10%). The benefit of adding 10% short-term US Treasuries is lower volatility and max drawdown at only a small cost for CAGR. The Sharpe Ratio is slightly higher too.

Interestingly, max drawdowns are worse for Portfolio 2 because the portfolio is 100% stocks. Furthermore, the drawdowns were longer on average for Portfolio 2. Portfolio 1’s drawdowns are slightly better but not by much. However, the 60% / 40% portfolio 3 has much more tolerable drawdowns of shorter duration.

Warren Buffett TWo-Fund Portfolio Drawdowns
Source: Portfolio Visualizer

Final Thoughts on Warren Buffett’s Two-Fund Portfolio

Most retirement plans have an S&P 500 index fund and a short-term US Treasury or cash option. Hence, Warren Buffett’s Two-Fund Portfolio is easy to implement. The pros of this portfolio are simplicity, ease of implementation, low cost, capturing much of the S&P 500’s returns with slightly lower volatility, and Warren Buffett recommended it. The cons are concentration, lack of diversification, too much exposure to large-cap stocks, no exposure to small-cap and mid-cap stock or international stocks, higher volatility, and more significant max drawdowns. That said, the S&P 500 has provided good returns over time. However, like some of the other lazy portfolios that I have discussed, the 60% total stock market and 40% total bond portfolio is always a good alternative.


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Chart or Table of the Week

Today I highlight South Jersey Industries (SJI). The gas utility stock price is in a severe downdraft due to fears of rising interest rates. The rising interest rate makes higher-yielding stocks less competitive versus bonds. However, SJI’s dividend yield is up to over 5.5%, and it is very safe. The current payout ratio is 74%, which is suitable for a utility. Operating cash flow covers the dividend. SJI has a BBB investment-grade credit rating. Regulated utilities have predictable revenues cash flows for the most part. SJI is a good bond substitute and can be used for income at the current dividend yield. Furthermore, the dividend is growing and has been raised for 22 consecutive years, making the stock a Dividend Contender. The valuation indicators show that SJI is undervalued.

The screenshot below is from Stock Rover*.

Source: Stock Rover*

Dividend Increases and Reinstatements

I have created a searchable list of dividend increases and reinstatements. I update this list weekly. In addition, you can search for your stocks by company name, ticker, and date.

Dividend Cuts and Suspensions List

I updated my dividend cuts and suspensions list at the end of August 2021. The number of companies on the list has risen to 530. We are well over 10% of companies that pay dividends, having cut or suspended them since the start of the COVID-19 pandemic.

There are three new companies added to the list this past month. These three companies are Eneti (NETI), International General Insurance (IGIC), and Washington Real Estate (WRE).

Market Indices

Dow Jones Industrial Averages (DJIA): 34,798 (+0.62%)

NASDAQ: 15,047 (+0.02%)

S&P 500: 4,456 (+0.51%)

Market Valuation

The S&P 500 is trading at a price-to-earnings ratio of 34.8X, and the Schiller P/E Ratio is at about 38.5X. These two metrics were down the past two weeks

. Note that the long-term means of these two ratios are 15.9X and 16.8X, respectively. 

I continue to believe that the market is overvalued at this point. I view anything over 30X as overvalued based on historical data. The S&P 500’s valuation came down as companies in the Index reported solid earnings lapping a Q2 2020 that had depressed earnings.

S&P 500 PE Ratio History

Source: multpl.com

Shiller PE Ratio History

Source: multpl.com

Stock Market Volatility – CBOE VIX

The CBOE VIX measuring volatility was down three points this past week to 17.75. The long-term average is approximately 19 to 20. The CBOE VIX measures the stock market’s expectation of volatility based on S&P 500 index options. It is commonly referred to as the fear index.

Source: Google

Fear & Greed Index

I also track the Fear & Greed Index. The Index is now Neutral at a value of 32. The Index is down two points this past week. This Index is a tool to track market sentiment. There are seven indicators in the Index that are measured on a scale of 0 to 100. The Index is calculated by taking the equally-weighted average of each indicator.

These seven indicators in the Index are Put and Call Options, Junk Bond Demand, Market Momentum, Market Volatility, Stock Price Strength, Stock Price Breadth, and Safe Haven Demand.

Junk Bond Demand indicates Extreme Greed.

Market Volatility is set at Neutral.

Market Momentum indicates Fear.

Safe Haven Demand is in Extreme Fear.

Stock Price Breadth indicates Extreme Fear.

Stock Price Strength is signaling Extreme Fear.

Put and Call Options are signaling Extreme Fear. 

Source: CNN Business

Economic News

The US Census Bureau reported new residential building permits were up 6.0% in August to a seasonally adjusted 1.728M, 13.5% above the August 2020 rate of 1.522M. New residential building permits increased in all regions, with the Northeast leading (+18.5%), followed by the South (+6.7%), West (+3.5%), and Midwest (+0.9%).

The US Federal Reserve reported that the target range for the federal funds rate would remain unchanged at between the 0.00% – 0.25% range. Still, moderation in its $120 billion asset purchase program is likely coming sooner than later. The central bank stated, If progress continues broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted.”   The Committee indicated that it would continue to increase its holdings of Treasury securities by at least $80 billion per month, and agency mortgage-backed securities by at least $40 billion per month, until substantial further progress has been made toward maximum employment and price stability goals.

The Labor Department reported an increase in initial jobless claims for the week ending September 18. The seasonally adjusted initial claims came in at 351,000, an increase of 16,000 from the previous week’s upwardly revised level. The four-week moving average, which smooths out volatility was 335,750, a decrease of 750 from the last week’s revised average.

Thanks for reading Warren Buffett’s Two-Fund Portfolio – Week in Review!


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Prakash Kolli is the founder of the Dividend Power site. He is a self-taught investor, analyst, and writer on dividend growth stocks and financial independence. His writings can be found on Seeking Alpha, InvestorPlace, Business Insider, Nasdaq, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, and leading financial sites. In addition, he is part of the Portfolio Insight and Sure Dividend teams. He was recently in the top 1.0% and 100 (73 out of over 13,450) financial bloggers, as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.

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2 thoughts on “Warren Buffett’s Two-Fund Portfolio – Week In Review

  1. Interesting take on another portfolio. I don’t like having the idea of bonds in my portfolio, I would rather be all equity, as I have the the time to accept risk. Where I also agree, that he is not diversified in other parts of the market opening himself to not capitalising ion those sector gains.

    have you looked at doing the The Ray Dalio All Weather Portfolio? People claim its the be all and end all, but I do not have an appetite for commodities.

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