Buffett's 2013 letter directs wife's trust to buy Vanguard S&P 500 fund

Warren Buffett directed the trustee of his wife's estate to allocate 90% of the portfolio into a low-cost S&P 500 index fund, specifically suggesting Vanguard, while placing the remaining 10% in short-term government bonds. This instruction, detailed in Berkshire Hathaway's 2013 shareholder letter, outlines a strategy for managing a large inheritance where the bond reserve serves as a liquidity buffer to cover annual spending without forcing stock sales during market downturns.

The investment vehicle named is a Vanguard S&P 500 index fund that tracks the roughly 500 large U.S. companies in the index by market value. Because the fund does not employ analysts to pick individual stocks, it maintains an expense ratio of 0.03%. Over the past decade, the share price of this fund increased by approximately 324%.

A hypothetical calculation illustrates the impact of low fees and time. Assuming a constant annual return of 9.5%, investing $300 monthly for 30 years results in a total contribution of $108,000 growing to about $610,000. The difference, roughly $502,000, is attributed to compounding, with the majority of that growth occurring in the final decade of the period. This figure is described as a straight-line illustration of compounding mechanics rather than a forecast, as actual market returns fluctuate between gains and losses.

Fees are a significant variable in this equation. If an annual fee of 1% reduces the effective return from 9.5%, the same $300 monthly investment over 30 years yields approximately $495,000. This one-percentage-point difference in costs results in a loss of roughly $115,000 compared to the lower-fee scenario, an amount that exceeds the total principal contributed over the period.

The duration of the investment horizon also affects the outcome. Shortening the same plan to 20 years results in total contributions of $72,000 growing to about $214,000 at the same assumed rate. Missing the final ten years of a 30-year plan costs more than the deposits skipped during that time, as compounding effects are most pronounced in later years.

For investors with shorter time horizons or limited safety nets, a 90% stock allocation carries risk, as a market decline could force selling at low prices. The account type used also influences net returns; within tax-advantaged vehicles like an IRA or 401(k), dividends and gains grow without an annual tax bill, allowing more capital to remain invested and compound.