Has anyone not heard of Warren Buffett? Hahaha. He may be in one of my series in the possible future. But yes, some information about him first:
1. He was born in 1930, Omaha Nebraska (That's why he is also nicknamed as the Oracle of Omaha). 2. He is one of the most successful investors of all time, with a net worth of US$72B (corrected as of 4th May 2020).
3. He runs Berkshire Hathaway (BRK.A), a company with the highest stock price in the work (It is priced at US$273,975. This is already lower due to the Covid-19 situation.)
4. He became a millionaire at the age of 30 (I aim to have 1/10 of what he has by 30)
5. He became a billionaire at the age of 55 (I aim to be 1/500 of what he has by 50)
As you can see, he is really really really rich. In fact, he is the 4th richest person in the world. He is also a firm believer in value investing. According to him, there are companies in which the stock market would value lower than its intrinsic value (undervalued). Hence, he has invested in these companies that brought him to his fortune today.
Portfolio
Thus, I thought it would be interesting to figure out what he perceives to be a good retirement/long-term portfolio. The information is found in his 2013 letter to Berkshire Hathaway shareholders. In the instructions to his will, Buffett has instructed the trustee to invest 90% of his asset (the amount left over after donating a large portion to charity) into a low-cost S&P 500 index fund and invest the remaining 10% into short-term government bonds.
Reasoning:
He reasoned that the majority of high-fees managers underperform market indexes like the S&P 500 in the long run, hence, he believes that the portfolio returns held by this trust will be superior to those attained by most investors. The 10% allocation to bonds also acts as a hedge against stocks as when the S&P 500 goes down, government bonds would rise in value.
With that settled, let us take a look at the backtest of the performance of this portfolio, shall we? I will be splitting this into 3 portions, the long-term performance of this portfolio, performance during bull markets, and bear markets.
Some of the data were taken from other financial blogs as I am unable to find the long term data. But if we were to look at a specific bull and bear market, I am able to test for them.
Portfolio 1 is the 90/10 Buffett Portfolio while Portfolio 2 is the 100% S&P 500 portfolio
Long term return:
From 1977 - 2019. We can see that the 90/10 portfolio does have a lower variance as compared to the 100% S&P 500 portfolio. But also, it has a noticeable lower return as well.
Bear Market Performance (Mar 2000 - Oct 2002) and (Dec 2007 - June 2009)
2000 - 2002
2007-2009
Bull Market Performance (Oct 2002 - Dec 2007) and (June 2009 - Jan 2020)
2002 - 2007
2009 - 2020
From our observation, Buffett's portfolio has done better than the pure S&P 500 portfolio in a bear market, but worse in a bull market. Duh. Next better financial blogger, please. hahaha.
But what I want you to understand is that in a bear market, there is some significance in the CAGR and best year performance. In the GFC, CAGR of portfolio 1 was -21.42%, the best year was 3.12% CAGR of portfolio 2 was -24.16% and the best year was 3.21%. In the dotcom bust, portfolio 1's CAGR was -11.68%, the best year was -1.25%. Portfolio 2's CAGR was -13.89% and its best year was -2.38%. This would really show the impact that having some stocks would have on your portfolio. It can cushion a bit of your losses, while in an upmarket during a bear market period, it can perform just as well.
So... two key points:
1. Minimise your losses
2. Perform almost as well in an upmarket in a bear market period.
Meanwhile, the bull market scenario is quite in line with what we hold as conventional wisdom. So there isn't much to write about.
Just one more fun fact before I end of this series. Someone did the 4% rule with a 90% stocks and 10% bond portfolio. They have discovered that only 2.38% failed in a 30 years retirement period. It performed almost as good as a 60% bond and 40% stocks portfolio. Hence, this is something that you might want to take note of.
While this portfolio may not allow you to be as rich as Warren Buffett, I hope that the lessons learned today will allow you to take better control of your personal finance.
Till then,
Stay vested, stay frugal my friends.
Dionysius
Sources
https://www.theoptimizingblog.com/warren-buffett-portfolio/
https://www.fool.com/investing/2019/11/26/an-in-depth-breakdown-of-warren-buffetts-portfolio.aspx
https://www.fool.com/investing/2019/09/08/warren-buffetts-investing-plan-for-his-family-why.aspx
https://www.investopedia.com/articles/personal-finance/121815/buffetts-9010-asset-allocation-sound.asp
https://www.financial-planning.com/news/testing-warren-buffetts-suggested-retirement-portfolio
https://www.gurufocus.com/news/824671/how-warren-buffett-made-his-first-million
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