ZSP:CC - Canadian Investors: Recreate Warren Buffett's 90/10 Portfolio With These 2 BMO ETFs
I don’t think Warren Buffett needs any introduction. Quite simply, he is arguably the most successful value investor and stock picker in history, with a long track record of outperforming the market handily.
However, rather than trying to find undervalued stocks , Buffett has advised that the masses keep it simple and just invest passively in an S&P 500 index fund . Buffett loves the index as a hands-off, low-cost method for building wealth.
Buffett’s strategy
In a 2013 letter to Berkshire Hathaway shareholders, Buffett indicated that upon his passing, the trustee of his estate will invest 90% of his wife’s inheritance in a low-cost Vanguard S&P 500 Index Fund, and the other 10% in short-term U.S. treasury bonds. That’s quite a departure from Berkshire’s portfolio of hand-picked value stocks!
Make no mistake, this is a risky portfolio that can have volatile movements along with the rest of the market. Most of the risk here is still being contributed by the 90% stocks, with the 10% bonds not doing much to offset volatility. I think Buffett sees that 10% as a safer parking garage for his massive cash fortune — his wife could live off that alone indefinitely.
However, the portfolio does quite well for investors with a long time horizon and even holds up during the retirement withdrawal phase. Javier Estrada , professor of finance at the IESE Business School in Barcelona, Spain, found that Buffett’s 90/10 asset allocation works well with a 4% withdrawal rule. Looking at rolling 30-year intervals, Estrada found that Buffett’s portfolio had a low failure rate of 2.3%, which was comparable to the traditional 60/40 portfolio.
Which ETFs should you use?
Investors looking to implement Buffett’s 90/10 portfolio can convert currency and buy USD-listed ETFs in their RRSPs. This grants access to the funds of his choice and saves you 15% on the foreign withholding tax imposed on non-Canadian dividends.
However, if you’re looking for a simple solution without the hassle of currency conversion, using Canadian-listed ETFs is fine too. You’re sacrificing a smidgen of tax efficiency for simplicity, which I think is always worth it. Don’t let the tax tail wag the dog, as they say.
For the equity portion, investors can buy BMO S&P 500 Index ETF (TSX:ZSP) , which costs a low management expense ratio (MER) of 0.09%. For the bond portion, investors can buy BMO Short-Term Federal Bond Index ETF as a substitute for short-term U.S. Treasuries for a 0.22% MER.
To make a Canadian version of Buffett’s portfolio, hold these two ETFs in a 90/10 allocation with dividends reinvested and annual rebalancing. ZSP will be driving most of your returns, allowing you to match 90% of the S&P 500’s total return, while VSB reduces volatility slightly and allows you to park some cash to buy dips with.
The Foolish takeaway
The Warren Buffett 90/10 portfolio is an extremely simple, low-cost, and easy to implement investment strategy. I expect it to outperform the majority of stock pickers and actively managed funds out there.
However, it could be optimized further. Personally, I would prefer more of an allocation to long-term U.S. Treasuries, small-cap value stocks, and international stocks for lowered volatility and improved risk-adjusted returns.
Then again, who am I to argue against Buffett’s advice?
The post Canadian Investors: Recreate Warren Buffett’s 90/10 Portfolio With These 2 BMO ETFs appeared first on The Motley Fool Canada .
Fool contributor Tony Dong has no position in any of the stocks mentioned. The Motley Fool recommends Berkshire Hathaway (B shares).
2022