What is the 90/10 Strategy?
Warren Buffett is oft-regarded as one of the most intelligent investors to ever do it. He’s been very vocal about choosing an indexed approach to investing, calling it his 90/10 strategy. What is the 90/10 strategy? According to Buffett, it’s a portfolio allocation rule wherein you delegate 90% of your portfolio to low-cost index funds and 10% to short-term government bonds. Buffet cites this strategy as a cornerstone of long-term investment stability.
For many investors, the 90/10 strategy doesn’t seem all that exciting. That’s because it’s not! In the words of another very wise investor, Paul Samuelson: “Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.”
If you’re more of the “slow and steady wins the race” mindset, Buffett’s 90/10 strategy is one you’ll want to investigate for yourself. Not only is it a fundamentally sound investment strategy, it’s one that’s tried, true and proven to accumulate wealth.
The 90/10 Strategy in Practice
Let’s say you have $100,000 to invest. If you abide by Buffett’s 90/10 allocation, you’d put $90,000 in the S&P 500 (or similar fund) and $10,000 in one-year treasuries. Then, you’d sit back and let market forces go to work. There’s no rebalancing or reallocating, and no need to worry about market volatility. In fact, Buffett would argue that you don’t need to even look at your account for a year, until it’s time to cash out your treasuries.
The simplicity of this strategy is why it’s effective. The 90/10 strategy eliminates almost every factor that might cause you to lose money:
- There’s no stock picking, since you’re broadly invested
- There is very little volatility, since index funds are broad and treasuries are stable
- There’s no impulse, since you’re setting and forgetting your portfolio
- There are no management fees or anything else to drag down return
The only factor involved in these investments is time—and time is usually on your side if you’re a long-term investor. At the end of one year, you’ll gain the fixed return from the T-bills and match the average return of the stock market through your index investments. The only way you’ll lose money is if there’s a market downturn.
Variations on the 90/10 Strategy
Like most investment philosophies, the 90/10 rule isn’t hard-and-fast. In fact, Buffett himself recommends investing for risk tolerance and age. As a result, the 90/10 rule can vary to as much as 70/30. As a rule of thumb, 90/10 is ideal for investors who want to take their investing journey one year at a time. Someone gravitating toward a 70/30 split likely has a shorter time horizon and can’t afford to allocate as much into the stock market.
There are also nuances in how to invest your money. The S&P 500 isn’t the only index out there. Investors willing to bear a little more risk may choose an index like the Russell 2000 and offset that risk with T-Notes or high-grade corporate bonds. There’s an opportunity to customize a 90/10 (or similar ratio) strategy around the level of risk you’re comfortable taking on.
Additional Considerations in the 90/10 Strategy
While the 90/10 strategy is largely a “set it and forget it” mode of investing, there are some considerations worth making. It’s recommended that investors pop open their portfolio and manage it bi-annually or annually. For example, you might choose to do this when your treasuries mature. Investors should stay apprised of general market sentiment and prepare to shift their strategy in the event of a bear market.
It’s also important to factor in regular investment contributions. It’s a smart idea to continually invest in broad-market funds throughout the year. For treasuries, let them mature fully, then reinvest with added principle to keep the 90/10 ratio versus your indexed holdings. For many investors, these are easy routines to follow to stay balanced and to continue to grow their principal balance month over month.
The Drawback of the 90/10 Strategy
There’s one glaring downfall to the 90/10 strategy, and that’s interest rates. Buffett’s allocation assumes that treasuries or similar high-grade bonds will return a respectable amount—somewhere around 4-5%. Unfortunately, treasuries have been a historically poor investment over the last decade. Putting 10% of your money into a vehicle that earns less than 2% annually means you’re not even keeping up with inflation.
Many investors have adopted a 100% indexed approach while treasuries remain depressed. While this means losing a marginal hedge against volatility, it also means capitalizing on double-digital index returns as the stock market continues to boom. Those who can’t stomach a 100% invested approach may opt to explore corporate bonds or a bond fund.
Buffett Practices What He Preaches
Warren Buffett’s 90/10 strategy is a glaringly simple one to follow. What is the 90-10 strategy? More than an allocation recommendation, it’s a way to invest without bringing emotions into the fold. You have little-to-no control over an index fund or treasuries, which means you can invest without worrying how to manage them. Moreover, you’ll subject yourself to market forces which prove time and again that they trend up and to the right.
Above all, Buffett’s strategy helps investors avoid costly fees from managed funds and put them in a position to keep more of the wealth they generate. It’s a strategy that’ll keep more money in your pocket and out of the hands of hedge fund managers known to under-perform broad market indices.
Need more inspiration to give the 90/10 strategy a try? If so, sign up for the Investment U e-letter below to begin your investment journey. In fact, Buffett has stated that it’s the method he’s using as his trust and estate planning directive. It’s a strategy he’s literally betting on until the very end!