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The Warren Buffett Portfolio for Novice Investors

By Catherine Brock - Mar 4, 2021 at 4:05AM

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It's so easy.

Tuning in to Warren Buffett's interviews and exploring his writings gives you an abbreviated introduction to the best practices of investing. And while Buffett often delivers conceptual nuggets of investing wisdom, he doesn't hold back on specific, actionable takeaways. For example, in a 2013 letter to Berkshire Hathaway shareholders, Buffett provided the exact allocations of the portfolio defined in his will. And guess what? That portfolio is crazy simple. If you have a brokerage account and know how to request a trade, you can mimic Buffett's plan today.

All you have to do is put 10% of your money into short-term Treasury securities and the rest into a low-cost S&P 500 index fund.

Smiling couple discusses their retirement portfolio.

Image source: Getty Images.

Government bonds for stability

In this two-position portfolio, the government bonds provide stability and liquidity. If you need cash at a time when you don't want to sell your equities, there's always a market for U.S. government securities. That role is important enough that you can accept the trade-off of very low yields (less than 1%).

"Short-term" means maturities of less than five years. You can choose from TIPS, which offer inflation protection, or standard Treasury bonds. Both are available for purchase at TreasuryDirect or through an ETF or mutual fund, such as the Vanguard Short-Term Inflation-Protected Securities ETF (VTIP 0.24%) or the Schwab Short-Term U.S. Treasury ETF (SCHO -0.04%).

S&P 500 stocks for growth

Your larger position in the S&P 500 should deliver share price appreciation as well as dividend income. An investment in the S&P 500 gives you diversification across hundreds of mature, financially capable companies. Specifically, these are 500 of the largest public companies in the U.S. Combined, they account for roughly 80% of the stock market's value and largely determine the behavior of the market as a whole.

You could invest in the S&P 500 companies individually, but most investors will follow Buffett's advice and buy a low-cost index fund instead. Low-cost means the fund has efficient operating expenses, which allows a greater share of investment returns to flow through to shareholders.

Two funds fitting that description are the SPDR Portfolio S&P 500 ETF (SPLG 3.10%) and the iShares Core S&P 500 ETF (IVV 3.12%). Another choice is the Vanguard S&P 500 ETF (VOO 3.11%), which was Buffett's pick back in 2013.

Adjustments you can make

Not even Buffett's portfolio is perfect for every situation. Holding 90% of your wealth in equities may deliver nice growth over time, but that comes with the risk of high volatility in the short term. You will need to modify that strategy if it doesn't align with your risk tolerance, which should be partly a function of your age. If you are in or near retirement, or if you simply don't like surprises, you'll prefer more stability than this portfolio provides.

The solution here is straightforward: Keep less money in the S&P 500 fund and shift more to your bond fund. A 50/50 split would be very conservative, while 70/30 would be moderately risky.

You'd also modify Buffett's approach if you don't intend to be a novice investor forever. In that case, you could dedicate, say, 10% of your portfolio to stocks you pick yourself. You might follow the two-portfolio model in your 401(k), for example, but then save a smaller amount monthly to a brokerage account that has access to the full range of exchange-traded securities. You can then develop and refine your own investing approach -- without risking the bulk of your wealth.

Find your balance

The big takeaway from 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 to your investment goals and timeline to identify the level of balance that works for you.  

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Stocks Mentioned

Vanguard Index Funds - Vanguard S&P 500 ETF Stock Quote
Vanguard Index Funds - Vanguard S&P 500 ETF
$360.00 (3.11%) $10.87
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
$417,401.43 (3.75%) $15,101.43
Vanguard Malvern Funds - Vanguard Short-Term Inflation-Protected Securities ETF Stock Quote
Vanguard Malvern Funds - Vanguard Short-Term Inflation-Protected Securities ETF
$50.45 (0.24%) $0.12
iShares S&P 500 ETF Stock Quote
iShares S&P 500 ETF
$392.00 (3.12%) $11.87
Schwab Strategic Trust - Schwab Short-Term U.S. Treasury ETF Stock Quote
Schwab Strategic Trust - Schwab Short-Term U.S. Treasury ETF
$49.11 (-0.04%) $0.02
SPDR Series Trust - SPDR Portfolio Large Cap ETF Stock Quote
SPDR Series Trust - SPDR Portfolio Large Cap ETF
$45.84 (3.10%) $1.38

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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