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 (BND) 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. 

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.

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.