The Personal Finance Podcast - The Complete Breakdown of The 2-Fund Portfolio (The Warren Buffett Portfolio)

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Starting point is 00:00:45 On this episode of the Personal Finance podcast, we are going to do the complete breakdown of the two fun portfolio, a.k.a. The Warren Buffett portfolio. What's up, everybody? And welcome to the podcast. Personal Finance Podcast. I'm your host, Andrew founder of mastermoney.com. And today on the personal finance podcast, we're going to be talking about the complete breakdown of the two fun

Starting point is 00:01:27 portfolio, aka the Warren Buffett portfolio. If you guys have any questions, make sure you hit us up on Instagram or TikTok at Master Money Co. And follow us on Spotify, Apple Podcasts, or whatever podcast player, you're listening to this podcast on right now. And if you want to help out the show, leave a five-star rating and review. view on Apple Podcasts or Spotify. Thank you so much for leaving those five-star ratings and reviews. They mean the world to me. And if you guys are getting value out of the show, make sure you share it with a family member or friend. So today, we're going to be doing a breakdown of the Warren Buffett portfolio. And we're going to go through this two fun portfolio. It is a very simple

Starting point is 00:02:05 portfolio to construct. And it is one that I think is an amazing portfolio to look at. And we're going to go to a deep dive breakdown. I'm going to get all my data from Y charts. If you've never seen Y charts. It's a great place to get really deep dive. Dave, if you're really serious about this stuff, it's an amazing way to actually get some of this information. So I'll link it up down below as well so that you can check that out. I think they have a seven-day free trial if you want to follow along and see some of the stuff that we're going to be talking about here today. So we're going to talk about this Warren Buffett portfolio. We're going to talk about why it's called the Warren Buffett portfolio. But the main reason is because he puts his own wife's money in this exact portfolio.

Starting point is 00:02:37 And the way that he breaks this down is his wife's money and his children's inheritance as well, goes in this exact portfolio and talks through why most investors should have some sort of portfolio just like this. And so what we're going to do is we're going to compare this portfolio to our good old fashioned friend, the S&P 500. Yes, the 500 largest companies in the U.S. stock market. Now, one thing I want you to note before we dive into this episode as well is Warren Buffett did not get rich off this portfolio. This is not how he built his wealth, but this is how he thinks 99% of people should invest their dollars. How Warren Buffett built his wealth is he bought businesses. He bought entire companies and built them up over time. He learned how to value

Starting point is 00:03:17 invest via Benjamin Graham and started investing very early on. And not only did he invest in the stock market, but he also would buy a bunch of different companies. For example, one that he bought early on was Sease Candy. And Seas Candy is a company that he bought for $25 million. And we bought this company, it was a struggling candy company. Then he built this company up and it pays something like 10x what he actually bought it for every single year back to him. And he has a bunch of different companies just like this example. And if you want to learn more about Warren Buffett, one of my favorite books about him

Starting point is 00:03:46 is called The Warren Buffett Way. And I don't really hear a lot of people talk about this book, but the Warren Buffett Way actually will take you through a bunch of his business deals and kind of how he thought through this process. And I absolutely love that book for that reason. And I try to read it every couple of years over and over again because it reminds me how to think through investing.

Starting point is 00:04:04 And it reminds me how investing should be approached and how you should approach any investment whatsoever. Now, as we deep dive into this portfolio, we're going to talk about the two fund Warren Buffett portfolio. We're going to talk about the performance of this portfolio. In addition, we're going to see how failproof is this portfolio. We actually had a researcher who went out and they looked at this. How failproof is the Warren Buffet portfolio?

Starting point is 00:04:26 Is it failproof or is there some instances where it could completely fail? And then we're going to talk about how to set one up in all of my favorite brokerages. So we're going to talk about M1 finance. We're talking about Vanguard. We're going to talk about Fidelity. And we're even going to talk about Charles Schwab as well. So without further ado, let's get into it. All right, so the first thing we're going to look at here is in this episode,

Starting point is 00:04:47 we're going to see where did Warren Buffett actually start talking about this? And he actually started talking through this in his letter to shareholders. Now, if you've never read Warren Buffett's letter to shareholders, we'll link it up down the show notes below. It is an amazing place to get some of the best investment information you've ever read in your entire life. And if you've never read them and you're really into investing, I would encourage you to go back and read all of them. They're all available on the Berkshire Hathaway website.

Starting point is 00:05:10 It is some of the most amazing reads that you will ever read. It's better than any investment book, in my opinion. And I go through and read them every single year. If you guys want me to do a breakdown of those letters every year as they come out, let me know, and I'll talk through that. I'll do an episode on that every single year of one of his letters that comes out for this year, for example. So for the Warren Buffett letter to shareholders, the first one that he mentioned this

Starting point is 00:05:30 portfolio in was 2013. So he first mentioned this in his 2013 letter to shareholders. And this is exactly what he said. In aggregate, American business has done wonderfully over time and will continue to do so. In the 20th century, the Dow Jones Industrials Index advanced from 66 to 11,497, paying a rising stream of dividends to boot. The 21st century will witness further gains almost certain to be substantial. Here's the key right here.

Starting point is 00:05:58 The goal of the non-professional investor, meaning you and I, the non-professional investor, should be not to pick winners, meaning not to pick any random stock. neither he nor his helpers can do that, but should rather be to own a cross-section of businesses that in aggregate are bound to do well. A low-cost S&P 500 index fund will achieve that goal. So here is hint number one that Warren lays out this portfolio. A low-cost S&P 500 index fund will achieve that goal. Now there's two questions here that we have. One is how much of our portfolio should be we holding in the S&P 500? And two, is there any other things that we to have in this portfolio outside of the S&P 500. We're going to find out here because in 2014,

Starting point is 00:06:41 he clarified some of this in his 200,014 letter to shareholders. And you can go on the website and read these as well if you want to look through here because it's a really, really cool read. My advice to the trustee could not be more simple. This is key right here, 10% of the cast in short-term government bonds and 90% in a very low-cost S&P 500 index fund. And then he says, I suggest vanguard. Buffett stated in a 2014 letter to shareholder. Then he goes on and says, I believe the trust's long-term results

Starting point is 00:07:11 from this policy will be superior to those attained by investors, whether pension funds, institutions, or individuals who employ high-fee managers. We just received portfolio advice from the greatest investor of all time. He just laid it out right here,

Starting point is 00:07:28 put 10% of the cash in short-term government bonds, and 90% in very low-cost SMP 500 index fund. He suggested Vanguard. We're going to talk about how to build that in Vanguard later on, and we're going to talk about how to build it in other brokerages as well so that you can get the best possible outcome here. But we just received portfolio advice from the world's greatest investor. Now, he goes on later on to talk about why he thinks this is an amazing portfolio. And the major reason why he likes index funds is because of fees. And he thinks that index funds will beat out fees. In fact, very early on, Warren Buffett made a bet with hedge fund

Starting point is 00:07:59 managers over the course of 10 years and said, hey, if an S&P 500 index fund will beat your returns, then we'll make a million dollar bet. This was a $1 million bet that Warren Buffett made with Wall Street. And guess who won? Warren Buffett actually won that bet, meaning the S&P 500 index fund that he invested in outperformed any mutual fund and active fund manager. Why? The fees are the biggest part about this.

Starting point is 00:08:21 And he thinks low-cost index funds, which is why we have index fund pro available to you, because I want everybody to learn how to invest in index funds in ETFs. It's our course that teaches you exactly how to do this. And this is why we did this. Because index fund investing is a way to build generational wealth. And Warren Buffett talks about it right here. So when we're talking through the Warren Buffett portfolio, what we want to know is, okay, well, what will this portfolio return? Obviously, we're going to go through a bunch of different things here.

Starting point is 00:08:45 We're going to break down this portfolio. But how would it return over time? So let's break down this portfolio and how he would actually construct it. And he's talked about this as well. So the Vanguard fund is VFIAX, is Vanguard's 500 index. Admiral shares. So that is the S&P 500 index fund that Warren Buffett invests his family's money in. And so he puts 90% in this S&P 500 index fund. And then in the bond market fund, he puts 10%. And the one that I like is VBTLX, which is the total bond market index fund. Now, he talks about short-term

Starting point is 00:09:15 bonds here, but the total bond market index funds means that you'll encompass a bunch of different bonds that are out there. So we're going to map this out in Y charts so that we can see how this exact portfolio would perform. So let's look at some key stats here. So I put this together in Y charts and some key stats that we have available. So with the Warren Buffet portfolio, if you have those two funds, your expense ratio would be 0.04%. This is an extremely low cost portfolio, which is why we want to reduce those costs. And it's a really incredibly important. We have an entire episode talking about how impactful this is, but it is a six-figure decision to reduce your costs when it comes to investing your dollars. The dividend yield is going to be 1.66% in this portfolio. Obviously,

Starting point is 00:09:53 the stock net allocation is going to be 90%. Bond net allocation is going to be 10%. And then, what we have here is the annualized all-time returns to the daily annualized all-time returns at the time recording this is 9.99%. So you guys hear me talking about a 10% rate of return all the time. This is 90% stocks, 10% bonds, 9.99%. And so this is incredibly important to understand. You got to understand some of these metrics when you are investing in index funds so you know what you're getting into. Priority number one is the expense ratio. And priority number two is making sure that's actually mirroring the index, meaning it's following the index exactly how it should be. So with the S&P 500 index fund, it should be following the S&P 500 to a T. That is very important to understand because

Starting point is 00:10:36 all it should do is mirror that index. And Vanguard's funds definitely, definitely do that. Now, one question you may be having here is, what about international exposure? There's no international exposure in this portfolio. And one thing to note about international exposure is that a lot of people out there recommend international exposure to diversify your investment when it comes to investing in stocks. They want you to have international exposure so that when the U.S. market doesn't do well, hopefully those international portfolios

Starting point is 00:11:02 will allow you to weather out that storm during those times. It helps you just have less volatility in your portfolio if the U.S. market is not doing well. And you can see it's missing international exposure here. So why would Uncle Warren leave out international exposure here? Here's my first reason. The S&P 500 has tons of companies who do business overseas.

Starting point is 00:11:23 In fact, you can think of Apple, for example. Apple makes all the components of its iPhone outside of the U.S. So it's doing a ton of international business outside the U.S. The S&P 500 is the 500 largest companies in the U.S. They are all doing international business for the most part. So this is something where you can look at Google, you can look at Facebook, you can think of all these large companies that are doing business outside of the U.S. There's a lot of international exposure inside of the S&P 500. That is number one. Number two is regulations for U.S. stocks are much higher. than regulation for international stocks are.

Starting point is 00:11:57 So this is another reason why Warren has talked about, why he looks at the S&P 500. And then number three, and this is a major one right now, is that international funds have vastly underperformed U.S. stocks. I mean, it is a massive difference between the two. Whereas the S&P 500 has returned over 10% to investors, these international index funds have done anywhere between 4% to 6% depending on what you're investing in.

Starting point is 00:12:21 So it's a much lower rate of return that has come about, especially in recent years. Now, there have been years where international funds outperform U.S. stocks, and typically, like we talked about, it's when there's big economic events in the U.S. So, for example, 2007 and 2008,

Starting point is 00:12:36 international funds did better than U.S. stocks. And during the tech bubble, they also did better during that time frame. So it depends on the time frame you're looking at. So context matters here when you're looking at your portfolio. You have to understand what the context is, and then you have to have some sort of tool

Starting point is 00:12:51 to map this out. Because check but verify should always be your go-to. I don't care if it's a financial advisor telling you what to do. I don't care if it's your uncle, your aunt, your best friend. It doesn't matter who is telling you

Starting point is 00:13:02 what to do me on this podcast. You need to trust, but verify when you're looking at some of these portfolio numbers. Never just listen to somebody and do it. That is the big key here. You've got to do your own research when it comes to building out your portfolio. This is your freedom that you have at stake.

Starting point is 00:13:16 So it's worth your time to do some research, then you can just set it and forget it. Once you have that research in play, you can say, hey, Do I want some of this international exposure? Do I want to have this in place? Because if it makes you feel weird that you have zero international exposure, then maybe that's an indicator of your risk tolerance.

Starting point is 00:13:31 And maybe you want to have some international exposure in there. Because listen, historic performance is obviously not an indicator of future results, but that's all we have to go on. It is all we have to go on is historic performance. So a lot of people will say what I just said as a caveat when they're trying to tell you something. But all we have to go off of is historical performance. It's all we have.

Starting point is 00:13:49 Nobody knows what's going to happen in the future. Nobody has a crystal ball. making sure that you do your own research is incredibly important when it comes to this stuff. But if you are uncomfortable without having any international exposure whatsoever, that talks about your risk tolerance. And maybe you should have international exposure. You've got to think through that and say, do I want this in my portfolio? And then look at some of the returns, do some of your research on there so that you can see, should I add international exposure? A three fund portfolio would be if you added international exposure to this portfolio. So say, for example, you wanted to have

Starting point is 00:14:17 70% in the S&P 500, 20% in a national fund and 10% bonds. Now you have a three fund portfolio. That's what you have in play there. And we will have some episodes coming up on a three fund portfolio as well and how it would perform against some of these. Now, we're going to talk about it here as well in a second. So the performance against the S&P 500. Let's look at this.

Starting point is 00:14:34 Now, obviously, we are looking at something that is heavily weighed in the S&P 500. These should be very, very close, but it should be a little bit lower because it has bond funds in there. So let's look at the difference here. When we're looking at this between the S&P 500 and the Warren Buffett portfolio, over this time frame, we can look at the last five years. the Warren Buffett portfolio returned 9.88% and the S&P 500 returned 10.75% at the time recording this. Over the last 10 years, the Warren Buffett portfolio did 11.57% and the S&P 500 did 12.67%. Over the last 20 years,

Starting point is 00:15:09 9.81% for the Warren Buffett portfolio and the S&P 500, 10.44%. In all time, 9.99% for the Warren Buffett portfolio and 9.9% for the S&P 500, which is very interesting, but it's an all-time return, not just returns over that time frame. So what I like to look at is the returns over the last 20 years. Warren Buffet portfolio, 9.81% S&P 500, 10.44%. Now, these should be obviously very close because it is so heavily weighted

Starting point is 00:15:38 with the S&P 500 in there. So we should expect these to be very close. But the next thing we're going to look at here is the performance against the three-fund portfolio, which I just talked about. We're going to do like a traditional three-fund portfolio and see how the Warren Buffett portfolio performed against that three fund portfolio next.

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Starting point is 00:18:58 Find your advisor at IGPrivatewealth.com. All right. So I went into Y charts and I have a three-fund portfolio that we created here. And the three-fund portfolio consists of VTSAX, which is the Vanguard Total Stock Market Index Fund, one of my favorite index funds of all time. And it's going to have 50% in VTSAX. it's going to have the international fund, VTIAX, which is the international index fund at 30%. And then it's going to have the Vanguard Total Bond Index fund at 20% VBTLX. Now, that's the three fund portfolio that we have here, 50, 30, 20 portfolio on this three fund

Starting point is 00:19:32 portfolio, okay? And we'll look at the difference between the two right now. So the last three years, the three fund portfolio has returned 4.92% to investors on a 50, 30, 20. and the Warren Buffett portfolio has returned 7.79%. Now, we've had a recent bear market when I'm recording this episode, so that's why some of these numbers are slightly lower at that time for the three-year mark. Over the five-year time frame, 9.78% to the Warren Buffett portfolio, and 6.19% to the three-fund portfolio.

Starting point is 00:20:04 Over 10 years, 11.59% for the Warren Buffett portfolio, and only 7.91% for the three-fund portfolio. over 15 years, 9.38% to Warren Buffett portfolio, 6.69% to the three fund portfolio. Over 20 years. Now, this 20 years is going to encompass that time frame I told you about in 2007 and 2008, where international stocks did outperform the S&P 500. And so you're going to see it's going to catch up here. So your time frame and the context really matters. This is what I'm talking about here because you could see the three fund portfolio was underperforming with those international stocks, but let's see what it does now. So at 20 years, 8.52% for the three fund portfolio. Amazing return. And then for the Warren Buffett portfolio, 9.87%. And then we're looking at all time returns during this time frame, 10.01% for the Warren Buffett portfolio and 7.15% for the three fund portfolio. So the Warren Buffet portfolio definitely has outperformed the three fund portfolio historically by at least 1% in every single time frame. So that is something to take note as well when you're looking at these three fund portfolios.

Starting point is 00:21:09 Now, three fund portfolios are also held a lot of times. in target date retirement funds. That's typically what it consists of is a three fund portfolio. Now the question then becomes, well, is the Warren Buffett portfolio a good retirement portfolio? That's something we got to consider as well because if we're going to construct this portfolio, how does it do over the course of retirement? So if you got that 9.81% return, if we take the 20 year returns and do it over the course of 30 years, let's say you've got that same exact return, then with a 9010 portfolio and you put $1,000 per month, every single month over the course of 30 years, at the end of that 30 years, you'd have $1,988,454 available to you

Starting point is 00:21:47 inside of that Warren Buff portfolio with that 9.81% return. So what that means is, if you had that in retirement, you could draw down $79,538 in retirement according to the 4% rule. If you don't know what the 4% rule is, it is a rule that states that you can draw on 4% of your portfolio in retirement and still preserve your wealth over that time frame. Now, if you are risky vers, you can go down to 3.5%. If you think that's too low, then you can go to 4.5% or whatever else you want to do. But the 4% rule is a nice, happy middle ground there.

Starting point is 00:22:19 Now, if you did it with $500 a month, the same thing, $500 per month over the course of 30 years, you'd have $994,27 in your portfolio. Now, if you increase that amount, it's going to be obviously much larger, but I think it's a great retirement portfolio that you can have in place at a 90-10 and really be able to still ride out some of those waves. And we're going to talk about that here as well, because is this portfolio failproof? That's a key that we want to understand here is, is this fail proof or how fail proof is it? Well, Javier Estrada, who is a financial researcher, did the research on this, where he's going to compare this to a lot more conservative portfolios as well.

Starting point is 00:22:54 We're going to do an entire episode on his research on these portfolios, but I'm going to touch on it here as well because it's very important when it comes to the Warren Buff of portfolio to understand this. So what he did was he took a $1,000 investment. He did it over a very long time horizon. So he had timeframes beginning 1900 all the way up to 2014. And I'm going to link up this paper as well down below if you want to read it. But he has timeframes all the way through this with 86 intervals in all. And he's looking at, well, how well does the Warren Buffett portfolio perform against other much more conservative portfolios? And so we have a very cool data set here that I'm going to go through that's going to show you, hey, here is how failproof this portfolio actually is.

Starting point is 00:23:33 So during all those time frames, all 86 intervals in those time frames, Here's the split. So he did the stock bond split and then he did the failure rate. So stock bond split meaning what percentage are in stocks and what percentage are in bonds and then what is the failure rate, meaning how likely is this to fail during all of these timeframes historically? So we're going to go through all of these here now. A 100% stock portfolio had a 3.5% failure rate, which is very low. I mean, this is a very low failure rate. It is something that you do not have to lose sleepover or anything like that is still a very low failure rate. Warren Buffett's portfolio had a 2.3% failure rate. Now here's where it gets interesting because an 80-20 portfolio,

Starting point is 00:24:15 meaning 80% stocks, 20% bonds had also a 2.3% failure rate. But the Warren Buff portfolio significantly outperformed the 80-20. 70-30 had a 1.2% failure rate. And the 60-40 portfolio, and this is what we're going to do probably an entire episode on as well as to break some of this down, the 6040 portfolio had a 0% failure rate, but the difference is the Warren Buffett portfolio significantly outperformed that 6040 portfolio. So the failure rate is only a 2.3% differential, even though 6040 is 0%, but the Warren Buffett portfolio significantly outperformed it. 50-50, 50% stocks, 50% bonds, 1.2%, 40, 60, 3.5%. And here's where it gets really wacky, a 30% stock, 70% bond portfolio, which most people consider a very safe portfolio, had a 12.8% failure rate.

Starting point is 00:25:08 So that would significantly underperform the Warren Buffet portfolio, and it has a way higher failure rate than the Warren Buffet portfolio. So if you go heavily weighted in bonds, what this shows is that your failure rate increases and you don't get as high of returns, because stocks historically have outperformed with bonds. So the Warren Buffett portfolio is an amazing asset allocation to consider when it comes to this and when it comes to actually building out this portfolio. So next what we're going to get into is how I would build the Warren Buff portfolio in every single brokerage. M1 Finance, Fidelity, Vanguard, and Charles Swab. So let's do that next. All right. So we are going to talk about how I would set up a Warren Buffet portfolio in various

Starting point is 00:25:45 brokerages. And the first one we're going to go through is M1 Finance. Why? Because M1 Finance just released a new feature that I absolutely love that allows you to rebalance your portfolio with one click. So M1 Finance, if you don't know what it is, it doesn't have index funds. It only has ETFs. So I'm going to show you how to build out a Warren Buffa portfolio with ETFs first. Then we'll go through the rest of the brokerages as well. And to make it easy, I also have a one click button where you can look at this portfolio on M1 Finance. So you can check that out in the show notes as well so that you can see this exact pie and have the Warren Buff of portfolio at your fingertips there. So the Warren Buff portfolio with ETFs, the first one is VOOO and VO is

Starting point is 00:26:20 Vanguard's S&P 500 ETF. So the target allocation, if it's a 90-10 portfolio, because you have 90% in the S&P 500, so VOO would be 90%. And then there's Vanguard's short-term treasure. ETF, which is VGSH. And VGSH is a 10% allocation. And that's how you can build out this portfolio with ETFs on M1 Finance. So that's the first one I would consider or look at, do your research on obviously. This is not investment advice. Obviously, I'm just telling you how I would build out these portfolios. But we have a link to that one down below so that you can check that out on M1 finance. And that's what I love about N1 finances. You can put these pies together and you just automatically invest into these pies. You can automate your finances, automated into these pies.

Starting point is 00:27:01 how you can completely automate your money when it comes to investing. Now, the second one is Vanguard. Vanguard, we've talked about, but the Vanguard Admiral shares, or VFIAX, is the Vanguard S&P 500 Admiral shares. So that would be 90% in the S&P 500, and the Vanguard total bond market index, or VBTLX, would be 10% into that side of the portfolio as well. Now, Fidelity has a very similar S&P 500 index fund. It's called FXAIX, and all these S&P 500 index funds in EETE, are just mirroring the S&P 500. So they all should have very, very similar returns when it comes to these portfolios. And then there's also a Fidelity short-term bond index fund.

Starting point is 00:27:41 And the ticker is FNS-O-X. So F-N-S-O-X would be 10% in the Fidelity Fund. And then with Charles Schwab, you can look at something like SWP-P-P-X for the S&P-500, which is the Schwab S&P-500 index. And then you can look at the Schwab short-term bond index, say that five times fast, sWS bx and that would be 10% allocation into Schwab when you do it that way so that is how we would build out a warn buffet portfolio in all of these different brokerages and one finance would be the easiest way to do it if you already have that open you can just click on that pie there and check that out but with any of these

Starting point is 00:28:17 brokerage accounts i like all of these brokerage accounts here that are available these are my four favorites that are out there and there are some that i don't like as well shout out robin hood don't like you there's a lot of great brokerages out there but these are my top four by far. Listen, I hope you guys learned a ton about the Warren Buffet portfolio today and the breakdown of this portfolio. If you like these types of episodes, if you like me to break down portfolios like this, let me know when we can do more episodes like this. You can reach out to me at mastermoney.com slash contact. If you just go to Mastermoney.com, there's a button in the up top there that's contact. Or if you want to submit a question for the show for our Money Q&A episodes, you can also do that

Starting point is 00:28:52 there or on Instagram. But let me know if you like these full on breakdowns. We could do more of them for different portfolios and let me know what portfolios you want us to look at. Listen, thank you guys so much for listening to this episode. If you want to learn more about how to invest in index funds and ETFs just like this, check out our course Index Fund Pro. It walks you through step by step on exactly how to build out your portfolio based on your risk tolerance and everything else. So check out Index Fund Pro if you're interested in it.

Starting point is 00:29:17 We made it affordable for everybody $99. So Index Fund Pro, we will have linked up in the show notes as well. Thank you guys so much for listening to this episode. Hope you learned a ton. I truly appreciate each and every one of you. All we want to do is bring you as much value as possible when it comes to building generational wealth. And I'm so excited to watch each and every single one of you do just that.

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The Personal Finance Podcast - The Complete Breakdown of The 2-Fund Portfolio (The Warren Buffett Portfolio)

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