No. of Recommendations: 10
With the S&P currently selling at a trailing P/E of 23 and 3-month T-Bills yielding 5%, Warren's recommended portfolio of 90% S&P 500 index fund/10% short term treasuries looks to me to be severely out of balance. While 90/10 would be fine for a 30-year holding period, it's far to heavy in stocks for a 5-year or 10-year holding period. I would say that 10/90 might be better for five years.
On the other hand, for a 5-10 year portfolio consisting of Berkshire Hathaway stock and 3-month T-Bills, then 80% BRKB/20% T-Bills might be appropriate because, unlike the S&P, BRKB is fairly valued.
A Kelly analysis that I read s few years ago concluded that if stocks were expected to outperform T-Bills by 4 percentage points, then a portfolio of 100% stocks and 0% T-Bills would be about optimal. If stocks were expected to outperform T-Bills by 3 percentage points, then a portfolio of 80% stocks would be about optimal; 2 percentage points, 60% stocks; 1 percentage point, 40% stocks and 0 percentage point 20% stocks (or something like that. I can't find the paper now). My guess is that over the next 10 years stocks will return 3% to 4%, BRKB 6%-7% and T-Bills 3% to 4%.
What allocation would you say is about optimal for a 5-10 year portfolio consisting of the S&P 500 and T-Bills and for a portfolio consisting of BRKB and T-Bills? How about for a three component portfolio consisting of T-Bills, BRKB and all of your other stocks combined?
I think about this all the time, but the older I get the less certain I become about my proper allocation.
