The Vanguard ETF Buffett Would Buy Today: A Value Investor's 90/10 Portfolio

Warren Buffett's investment philosophy for the average person is a masterclass in simplicity. It's a blueprint built on humility, discipline, and a deep understanding of human nature. His core principle is straightforward: most investors are better off not trying to beat the market at all. As he stated at Berkshire's 2021 annual meeting, "In my view, for most people, I think that the best thing to do is buy ... an S&P 500 index fund." This isn't just casual advice; it's the distilled wisdom of a man who has spent his life analyzing businesses and markets.

The specific portfolio he recommends is famously clear. In his 2013 shareholder letter, Buffett laid out the exact instructions he left for his wife's estate: "Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund." He even named his preferred vehicle: Vanguard's S&P 500 ETF (VOO). This 90/10 split is a value investor's dream in a bottle. It embodies the key tenets of the craft.

First, it's simplicity itself. No need to pick individual stocks, no endless research into quarterly earnings or management changes. You own a piece of the entire American economy through the 500 largest companies. Second, it's low-cost. By avoiding the fees and trading frictions of active management, you keep more of the market's natural returns. Third, it captures the market's long-term compounding power. The S&P 500 has delivered an average annual return of about 10% over the last three decades, a pace that can turn modest, regular investments into substantial wealth over time. Finally, it avoids the active management pitfalls. Buffett himself has noted that "In 58 years of Berkshire management, most of my capital-allocation decisions have been no better than so-so." If even he considers himself average, the odds are stacked against the typical investor trying to outperform the index.

Viewed through a value lens, the S&P 500 ETF isn't a speculative bet. It's a way to own a diversified cross-section of businesses that, over the long haul, are "bound to do well." It's the ultimate "set-it-and-forget" strategy, removing emotion and complexity from the equation. For the patient investor, this blueprint offers a reliable path to wealth creation, one that aligns perfectly with the patient, disciplined approach that has defined Buffett's own legendary career.

Evaluating the S&P 500's Current Moat and Valuation

The S&P 500 ETF, as championed by Buffett, is a portfolio of America's best businesses. Its top holdings-companies like Nvidia, Apple, and Microsoft-are textbook examples of wide economic moats. They generate massive, durable cash flows and possess the scale and innovation power to compound wealth for decades. This underlying quality is the bedrock of the index's long-term promise.

Yet for a value investor, quality is only half the equation. The other half is price. Here, the numbers raise a clear caution. As of November, the S&P 500's average CAPE ratio stood at 40. This is a historically elevated multiple, and the historical pattern is sobering: following such high multiples, the index has declined by an average of 30% over the next three years. This is the tension at the heart of the current setup. You are buying a basket of exceptional companies, but you are paying a premium that demands near-perfect execution from them for years to come.

The concentration of the index adds another layer of risk. The top 10 companies account for 41% of the S&P 500's market cap. While this reflects their dominance, it also means the index's fate is tied to a handful of stocks. A stumble by one or two giants could disproportionately drag the entire benchmark lower, regardless of the health of the other 490 companies.

The bottom line for a disciplined investor is one of margin of safety. The S&P 500's long-term compounding power remains intact, supported by its high-quality holdings. But at a CAPE of 40, the market is pricing in a flawless future. For a value investor, that leaves little room for error. The current price may not offer the adequate margin of safety that Buffett's own philosophy demands before committing capital.

The Role of Cash and Treasury Bills in a Buffett Portfolio

The 10% allocation to short-term government bonds in Buffett's model is not a passive holding; it is a strategic, active component of his investment discipline. This cash reserve, or "dry powder," serves a clear purpose: to provide the flexibility to act when the market offers opportunities that are too good to ignore. In practice, Buffett would likely choose a low-cost vehicle like the Vanguard 0-3 Month Treasury Bill ETF, which offers a current yield of 3.67% and an expense ratio of just 0.07%. This combination delivers a reasonable, low-risk return while waiting, effectively paying you to be patient.

The most powerful demonstration of this strategy is Berkshire Hathaway's own record-setting balance sheet. As of 2025, the company's cash and Treasury bill hoard had swelled to a staggering $340 billion. This is not a sign of indecision, but a calculated posture. Buffett has been vocal about the caution his portfolio reflects, and the numbers confirm it. The pattern of 2025 was telling: Berkshire continued to add to its cash pile, trimmed its massive Apple position, and made only selective, value-oriented purchases in sectors like health insurers and homebuilders. Net stock sales dominated the year, with the company's own share repurchases largely on pause.

This behavior is the essence of disciplined value investing. When valuations appear rich-when the market's CAPE ratio is elevated and the top holdings command premium prices-Buffett's playbook is to wait. He lets the cash generate a real yield, as it is doing now, while he observes. The goal is to have ample resources ready to deploy when fear sets in and creates bargains. As the evidence shows, Buffett has been mostly quiet in 2025, but his few moves have been deliberate. The message for retail investors is clear: in a frothy market, the most profitable action is often to do nothing, preserving capital for when the market corrects and prices come to you.

Catalysts, Risks, and What to Watch

For a value investor, the S&P 500 ETF is a holding that demands patience. Its future performance hinges on a few key catalysts and risks that are playing out right now.

The primary catalyst is a market correction. The current setup-a CAPE ratio near historic highs and a concentration of top holdings-creates the conditions for a significant re-rating. As the evidence shows, following such high multiples, the index has historically declined by an average of 30% over the next three years. The catalyst for a value investor is not a prediction of a crash, but the potential for prices to fall to levels where the market's intrinsic value becomes more apparent. This is the moment when the patient investor's cash, like Berkshire's record $340 billion war chest, can be deployed.

The most immediate risk is a prolonged period of high interest rates. The 10-year Treasury yield rose to 4.23% on January 16, its highest level in over four months. This matters because it raises the discount rate used to value all future corporate earnings. When Treasury yields are elevated, the present value of those distant cash flows declines, putting direct pressure on equity valuations. This "higher-for-longer" environment is especially challenging for growth stocks, which rely on future profits, and it suppresses the multiples that currently support the S&P 500's premium price.

For the patient investor, the key watchpoints are clear. Monitor the 10-year Treasury yield as a gauge of the risk-free rate and a signal for equity valuations. Watch corporate earnings growth to see if it can accelerate enough to justify the current price. More broadly, track the market's risk-adjusted return profile. If yields stay high and earnings growth falters, the math for owning equities becomes less compelling.

Berkshire Hathaway's recent pattern offers a powerful real-time case study in market caution. The company has been a net seller of stocks for 12 straight quarters, with net sales totaling $184 billion. Its strategy has been to add to its massive cash and T-bill hoard while trimming its largest position, Apple. This behavior, even as it makes selective value buys in sectors like health insurers and homebuilders, is a stark signal. When the world's most patient investor sees a market that is too expensive, his playbook is to wait. For the retail investor, the lesson is to emulate that discipline. In a frothy market, the most profitable action is often to do nothing, preserving capital for when the market corrects and prices come to you.