When investing for his wife, Buffett chooses index funds and government bonds.

Imagine sitting down with Warren Buffett to discuss how you should invest for retirement. A lot of questions come to mind. Would he suggest buying shares of Berkshire Hathaway? Would he favor individual stocks or mutual funds? How much would he recommend one invest in stocks versus bonds? Would he suggest specific investments or just give general advice?

In his recently released letter to Berkshire Hathaway shareholders. Buffett gives us a glimpse into how he views long-term investing. As arguably the greatest stock picker of our time, his perspectives may surprise you.

Buffett describes advice he has left in his will as to how the trustee should invest money Buffett is leaving for his wife. Here’s Buffett’s advice:

“My advice to the trustee could not be more simple: Put 10 percent of the cash in short-term government bonds and 90 percent in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.)”

Index funds beat stock pickers. Study after study shows that actively managed mutual funds underperform low-cost index funds over the long term. Actively managed funds charge significantly more in fees and have proven to be unable to make up that difference through outsized gains.

While it may surprise some people that Warren Buffett would bet against stock picking, it’s nothing new. Buffett has wagered $1 million that a select group of hedge fund managers cannot beat the S&P 500 over a 10-year period. With four years remaining, Buffett has a big lead. In his book “Think, Act, and Invest Like Warren Buffett”, Larry Swedroe discusses Buffett’s strong preference for low-cost index funds for the vast majority of investors.

Domestic funds beat foreign funds. Buffett is bullish on the U.S. In his letter to Berkshire shareholders he writes, “Indeed, who has ever benefited during the past 237 years by betting against America? If you compare our country’s present condition to that existing in 1776, you have to rub your eyes in wonder. And the dynamism embedded in our market economy will continue to work its magic. America’s best days lie ahead.”

Buffett translates his optimism in America to his advice for the trustee. He advises that not a single dollar be invested in a foreign mutual fund.

Stocks beat bonds. It’s clear where Buffett stands on stocks versus bonds. With 90 percent of the portfolio invested in an S&P 500 fund, he makes clear his strong belief that stocks will outperform bonds over the long run. The volatility of stocks doesn’t dissuade Buffett from a stock-heavy portfolio. As he’s noted in the past, he doesn’t see volatility as the key risk. Instead, loss of purchasing power of your capital is the key risk.

Short-term bonds beat long-term. For his bond portfolio, Buffett sticks with short-term government bonds. By focusing on government bonds, Buffett all but eliminates credit risk. And by focusing on short-term durations, he minimizes interest rate risk. He’s clearly not looking to bonds to drive returns, as he avoids longer durations, high yield and foreign bonds. Instead, the bonds are chosen for their safety. perhaps to fund short-term income needs.