Key insights
- The article highlights Warren Buffett's advocacy for including Treasury bills in a diversified portfolio, particularly through the Vanguard 0-3 Month Treasury Bill ETF (VBIL). It suggests that in a bull market dominated by tech stocks, a cash position in Treasury bills offers income and reduces portfolio volatility. It also provides dry powder for capitalizing on market downturns, aligning with Buffett's value investing approach. Current yields of 3-4% make Treasury bills an attractive alternative to equities.
Ever since the Federal Reserve's aggressive rate-hiking cycle in 2022 resulted in the worst performance for long-term Treasuries in decades, investors have mostly ignored fixed income in their portfolios. That's been especially true given the artificial intelligence (AI) boom, which has produced huge returns for tech, semiconductor, and growth stocks.
Overweighting these stocks in a raging bull market isn't really Warren Buffett's style, nor is ignoring fixed income in a diversified portfolio. His value-tilted approach hasn't done particularly well in the past few years, but it's been undeniably successful over the decades that he's been investing.
For most investors, he advocates for a simple approach that involves the majority of a portfolio being invested in the S&P 500 but also a modest allocation going to Treasury bills. For this purpose, Buffett would likely endorse an investment in the Vanguard 0-3 Month Treasury Bill ETF (VBIL +0.03%).
In bull markets, most investors want to be 100% invested in stocks. Unfortunately, bull markets don't last forever, and conditions can turn south quickly, leaving all-equity portfolios vulnerable to steep losses. We saw this as recently as March.
Keeping a cash position in your portfolio serves two primary purposes. First, it can provide a real income component that helps mitigate overall portfolio volatility. Back during the majority of the 2010s and as recently as the post-COVID pandemic years, cash provided virtually no income as the Fed sought to keep rates as low as possible. That's changed. Today, Treasury bills routinely offer yields of 3%-4%, making them an intriguing risk/reward alternative to equities.
Second, it allows investors a parking spot for cash ready to be put to work. Warren Buffett likes to take advantage of value opportunities if the underlying stock falls far enough. Environments where volatility ticks higher and stock prices pull back can be ideal short-term entry points to capture a potential bounceback. Having cash ready instead of needing to liquidate other long positions is the better approach.