[Editor’s note: “Take Buffett’s Advice: 5 Vanguard Funds to Buy” was previously published in February 2020. It has since been updated to include the most relevant information available.]
Vanguard should probably be thanking Warren Buffett.
In Berkshire Hathaway’s (NYSE:BRK.A, NYSE:BRK.B) 2014 shareholder letter, Buffett mentioned Vanguard funds in a big way.
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Specifically, he recommended that the cash left to his wife be invested 10% in short-term government bonds and 90% in a very low-cost S&P 500 index fund. Not just any index fund mind you, but a Vanguard fund in particular.
Whether it be exchange-traded funds (ETFs) or mutual funds, the Oracle of Omaha believes Vanguard funds are the way to go. With that in mind, I’ve put together a portfolio of two ETFs, two mutual funds and a fifth wildcard. The resulting portfolio should be appropriate for Buffett’s wife — or anyone else, for that matter.
Vanguard 500 Index Fund Admiral Shares (VFIAX)
Source: Casimiro PT / Shutterstock.com
Allocation: 50% of Portfolio
10-Year Performance: 10.49%
The goal is to keep costs to a minimum while generally sticking to Buffett’s hypothesis when it comes to his wife’s investments. Although Vanguard does offer commission-free ETFs, I recommend a mutual fund for the S&P 500 investment.
The Vanguard 500 Index Fund Admiral Shares (MUTF:VFIAX) charges an annual expense ratio of just 0.04%, or $4 on a $10,000 investment.
Your annual fees would amount to a mere $20 on a $50,000 portfolio. That’s hard to beat, and Buffett knows it. The largest holdings in this fund include Microsoft (NASDAQ:MSFT), Apple (NASDAQ:AAPL) and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL). The minimum investment is $3,000.
Vanguard Mid-Cap Index Fund Admiral Shares (VIMAX)
Source: Shutterstock
Allocation: 20% of Portfolio
10-Year Performance:
9.94%
The VFIAX covers the large-capitalization portion of the portfolio quite nicely.
While Buffett might not be fond of mid-cap stocks being added to the mix, evidence suggests mid-caps outperformed large-cap stocks over a four-year period between 2009 and 2013.
In fact, John Hancock published a report cautioning investors about underweighting mid-caps because of an assumption that a large-cap fund combined with a small-cap fund will do the job. That’s simply not the case.
Mid-cap stocks tend to provide an attractive combination of risk and reward. For this reason, I recommend the Vanguard Mid-Cap Index Fund Admiral Shares (MUTF:VIMAX), which tracks the CRSP Mid Cap Index, an index composed of stocks that fall between the top 70%-85% of investable market capitalization.
They’re big enough to survive an economic hit but small enough to still be growing. With an expense ratio of 0.05%, this entry on our list of Vanguard funds is giving you safety and performance in one. Top holdings include Newmont (NYSE:NEM), Centene (NYSE:CNC) and TransDigm (NYSE:TDG).
Vanguard FTSE All-World ex-US Small-Cap ETF (VSS)
Source: Shutterstock