What Is the 90/10 Strategy?

What Is the 90/10 Strategy?

Let me tell you about the 90/10 strategy, which legendary investor Warren Buffett introduced in his 2013 chairman's letter to Berkshire Hathaway shareholders. This approach directs you to invest 90% of your capital in low-cost stock index funds and the remaining 10% in low-risk government bonds.

It stands apart from typical investing advice that recommends decreasing stock allocations and increasing bonds as you age.

Key Takeaways

To break it down, the 90/10 strategy means putting 90% of your investments into low-cost S&P 500 index funds and 10% into short-term government bonds. Buffett shared this in his 2013 shareholder letter, and it's notably aggressive compared to standard asset allocation models—not ideal for every investor.

How the 90/10 Strategy Works

Warren Buffett's annual letters have long been a must-read for investors aiming to follow his path, and in 2013, he dedicated a paragraph to the 90/10 strategy that still resonates today. He put it plainly: his own money follows this advice, with instructions in his will for a trustee to allocate 10% to short-term government bonds and 90% to a low-cost S&P 500 index fund like Vanguard's. He believes this will outperform most investors using high-fee managers, whether they're pension funds, institutions, or individuals.

An Example of the 90/10 Strategy

Suppose you have a $100,000 portfolio and decide to apply the 90/10 strategy—you'd put $90,000 into an S&P 500 index mutual fund or ETF, and $10,000 into Treasury bills. These T-bills are short-term government debt with maturities up to a year, available directly from the government, via brokers, or as funds and ETFs. They're among the safest investments, much like longer-term Treasury notes and bonds.

To figure the portfolio's performance, multiply each part by its return. If the S&P 500 gains 10% and T-bills yield 4%, it's 0.90 times 10% plus 0.10 times 4%, equaling a 9.4% overall return. Remember, ETFs function like mutual funds but trade on exchanges like stocks.

Keeping Fees to a Minimum

Buffett pushes index funds because their costs are extremely low due to passive management—they simply mirror an index like the S&P 500, which tracks 500 major U.S. companies, without active stock picking. Studies consistently show that few managers beat the index year after year.

Not all index funds are equal, so compare their performance and expense ratios; lower ratios mean better value. Also, steer clear of load funds with sales commissions by buying no-load options directly or through discount brokers.

Criticisms of the 90/10 Strategy

The main knock against a 90% stock and 10% bond split is its high risk and volatility. Compare it to strategies like subtracting your age from 110 for your stock percentage—at 40, that's 70% stocks and 30% bonds; at 65, it's 45% stocks and 55% bonds.

With so much in stocks, you're vulnerable to big short-term drops during market slumps, which can be tough emotionally, especially if you have low risk tolerance or a short timeline. As writer Walter Updegrave noted, the key question is whether you can stick with it during market chaos, particularly near retirement.

Alternatives to the 90/10 Investing Strategy

The 90/10 differs from the classic 60/40 portfolio, with 60% in equities and 40% in bonds, both balancing growth and risk but in varied proportions. The 60/40 has been a staple for moderate-risk investors, offering steady growth with bonds cushioning stock declines for income and appreciation.

The 60/40 is more conservative on risk, while 90/10 aggressively pursues growth, accepting higher volatility for potential bigger gains. If you're risk-averse, 60/40 might suit you better.

Who the 90/10 Investing Strategy Is For

This strategy fits long-term investors, like those in their 20s to 40s saving for retirement, who can weather volatility for equity growth. It also works for those with high risk tolerance who stay calm during losses, aiming for better returns than conservative options.

DIY investors appreciate its simplicity—minimal upkeep with index funds and bonds. And if you trust in ongoing market growth through innovation and profits, this aligns with that optimism.

Advantages of a 90/10 Investment Allocation

The big plus is the chance for stronger long-term returns from heavy stock exposure, ideal for high-risk-tolerant investors with decades until retirement.

Is the 90/10 Allocation Suitable for Conservative Investors?

No, it's generally too aggressive for conservatives who focus on preserving capital over growth and might find the volatility unacceptable.

How Often Should I Rebalance a 90/10 Investment Portfolio?

Rebalance annually or when allocations stray far from 90/10, like if stocks hit 95% or drop to 85%, to keep your targets in line.

The Bottom Line

The 90/10 is an aggressive tactic for those with high risk tolerance and a long horizon, backed by Buffett's success, but it won't suit everyone—consider your situation carefully.