The document compares the performance of Warren Buffett's recommended 90/10 portfolio of 90% S&P 500 index fund and 10% 1-3 year US Treasury securities index fund to broadly diversified funds and hedge funds over the past 25 years. It finds that the Buffett portfolio had the highest nominal return when fees are excluded, but similar returns to other strategies when fees are included. The Buffett portfolio also had higher risk, with a worst 12-month return of -44% compared to -35.2% for diversified funds. For long-term buy-and-hold investors less concerned with downside risk, the Buffett portfolio may be appropriate, but more globally diversified strategies with lower fees may better

1. The BuffettPortfolioCompared to Broadly DiversifiedFunds and Hedge Funds
Warren Buffettindicatedthathe hasdirectedthe trustee of hispersonal familytrusttoinvestthe
remainingassetsof hisfortune intwoindex fundsafterhisdeath.Specifically, the trustee shouldinvest
90% of the proceedsinan S&P 500 index fundand10% in a 1-3 yearmaturityUS treasurysecurities
index fund.He has famously commentedthathedge funds (andactive managementingeneral) have
failedtodeliverontheirpromisestoinvestorsbuthave beenagreatsuccessfor their managersin
transferringwealthfrominvestorstothe managers. Giventhe esteemthatthe Oracle of Omahais held
amongmany investors Idecidedtosee if hisinvestmentstrategyshouldbe imitatedbythose of usless
giftedinthe art of investing.
I lookedatthe returns,riskand costs of investingina90/10 allocation tothe S&P500 index and
Barclays1-3 year maturityUS Treasuriesoverthe past25-yearsas well as returnsto worldasset
allocation funds andhedge funds.The past25-yearscoverthe emergingmarketscurrencycrisisof 1997,
Russiandebtdefaultof 1998, the dot-combustin2000 andthe global financial crisisof 2008 as well as
the tech bubble of the late 1990s and the US housingbubble of 2005-2008. It alsoincludes the
commoditiesandemergingmarketsbull marketsof 2005-2012. By my estimate,thisperiodrepresents
roughly3 marketcycles and a fair periodof the moderneraininvestingwhichincludesmutual funds,
hedge fundsandexchange tradedfunds but, astheysay,past returnsare not indicative of future
performance. Here isasummaryof findings:
Buffett 90/10
Portfolio
Morningstar World
Allocation Funds Average
CreditSuisse/TremontBroad Hedge
Fund Index(since 1-1994)
Annualized
Return
8.9% 7.1% 7.8%
Risk(annual
volatility)
13.0% 9.6% 7.0%
Beta to the S&P
500 index
.90 .75 .83
Worst 12-mo
Return
-44.3% -35.2% -19.1%
Return/RiskRatio .68 .74 1.1
Annual Cost .05% 1.37%
2% annually +20% of returns above a
risk free return like a US T-bill
Performance statistics May, 1991 through April, 2016. Returns are annualized, net-of-fee.
Observations
If down-side riskisnota concernof the investor,the Buffettportfoliohadthe highestnet-of-fee
nominal returnwhencomparedwith assetallocation fundsandhedge funds.Itisinterestingtonote
that if feesare addedback,the worldallocationfunds andhedge fundreturns wouldhave been similar
to the Buffettportfolioreturns withlessrisk.Lesson:fees &expenses matter.
If down-side riskisof concern,the Buffettportfoliohadone twelvemonthperiodwhere itreturned
-44%, the worstof the three byfar. Hedge fundsprovidedsome down-sideprotectionrelative tothe

2. Buffettportfoliobutnotenoughtocategorically describe themas “absolute returnstrategies”asthey
had advertisedthemselvespriorto2008. Lessons:investordown-side risktolerancesneedtobe
considered inanystrategy andnot justreturnsand fees. Couldan investortolerate a-44% year without
panic?Do we knowif hedge funds will “hedge”down-sideriskadequately?
For a buy andholdinvestorwithalong-terminvestmenthorizonwhodoesnotlookattheiraccount
statementsfrequently,the Buffettportfoliomaybe anappropriate investmentsolution.Formanyof the
restof us,a more globallydiversifiedapproachmightbe abetterchoice thanan allocationof 90% large-
cap US stocks and 10% short-termUStreasuries.
Activelymanagedportfolios(includinghedgefunds)requirethe investortohave skill atmanager
selection,managerallocationandmanagerdue diligence.Theseare thingswhich mostprivate wealth
investorsdonothave the time,desire orresourcestounder-take.The simplicityof the Buffettportfolio
istherefore appealingtomany.
Advancesininvestmentmanagementtechnologyallow investorstoobtainglobal marketsreturnsinone
place at lowcost usingexchange tradedfund(ETF) fund-of-fundslike Blackrock’s iShares asset
allocationETF’s. These investmentscanbe leveredorde-leveredtoachieve down-side risk ordesired
returnobjectives withoutsacrificingtheirglobal diversificationnature andwithlowerdown-side risk
than the more concentratedBuffettportfolio. Perhapsa90/10 allocationtoa diversifiedglobal asset
allocationETFand a short-termUS treasurybondETF wouldbe a more appropriate alternative tothe
Buffettportfolioformanybuyandholdinvestors.
Contact me at gjohnsen@eastgateadv.com withcomments/questions.
Greg Johnsen,CFA manages aprivate familyinvestmentoffice inthe Atlanta,GA metropolitanarea.He
has 30 yearsof investmentexperience withprivatewealth,sovereignwealthandinstitutionalinvestors.
ConnectwithGregon LinkedIn.HisLinkedInprofile is gregjohnsencfa.
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