Is Warren Buffett’s 90/10 Asset Allocation Sound? (2024)

When most people challenge deeply ingrained wisdom about finances, they’re greeted with eye rolls. When one of the world’s most successful financial gurus is the contrarian, people listen.

Such was the case with Warren Buffett’s 2013 letter to Berkshire Hathaway investors, which seemed to challenge one of the longstanding axioms about retirement planning. Buffett noted that upon his death, the trustee of his wife’s inheritance was instructed to put 90% of her money into a very low-fee stock index fundand 10% into short-term government bonds. This is what is called the “90/10 investing strategy.”

Key Takeaways

  • In a 2013 letter to Berkshire Hathaway shareholders, Warren Buffett noted an investment plan for his wife that seemed to contradict what many experts suggest for retirees.
  • He wrote that after he dies, the trustee of his wife’s inheritance has been told to put 90% of her money into a stock index fundand 10% into short-term government bonds.
  • Most often investors are told to scale back on their percentage of stocks and increase their high-quality bonds as they age, so as to better protect them from potential market downturns.
  • A Spanish finance professor put Buffett’s plan to the test, looking at how a hypothetical portfolio set for 90/10 would have performed historically, and found the results were very positive.

Against the Norm

A well-worn adage in financial investing is to maintain a percentage of stocks equal to 100 minus one’s age, at least as a rule of thumb. For example, when you hit the age of, say, 70, you'll likely want most of your investment assets to be high-quality bonds that generally don’t take as big a hit during market downturns. Therefore, at age 70, 70% of your portfolio would be low-risk fixed-income securities while the remaining 30% would be higher-risk equities.

Because people are generally living longer and need to stretch their nest eggs, some experts have suggested being a little more aggressive. It’s now more common to hear about 110 minus your age, or even 120 minus your age, as an appropriate portion of stocks. Still, 90% in equities, at any age? Even for someone with Buffett’s bona fides, that seems like a risky proposition.

100 Minus Your Age

The rule of thumb advisors have traditionally urged investors to use, in terms of the percentage of stocks an investor should have in their portfolio; this equation suggests, for example, that a 30-year-old would hold 70% in stocks and 30% in bonds, while a 60-year-old would have 40% in stocks and 60% in bonds.

Will It Work for Every Investor?

It’s important to point out that the Oracle of Omaha didn’tsay that the 90/10 split makes sense for every investor. The larger point he was trying to make was about the makeup of portfolios, not the precise allocation. His main contention was that most investors will get better returns through low-cost, low-turnover index funds, an interesting admission for someone who’s made a fortune picking individual stocks.

There’s an obvious distinction between Mrs. Buffett and most investors. While we don’t know the exact amount of her bequest, one can assume she’ll get a cushy nest egg. She can likely afford to take on a little more risk and still live comfortably. Still, this 90/10 allocation drew considerable attention from the investing community. Just how well would such a mix of stocks and bonds hold up in the real world?

Understanding Low-Fee Index Funds

A crucial part of Buffet's 90/10 plan is the low-fee index fund. Low-fee stock index funds offer numerous advantages to investors. First, their cost-efficiency ensures that a significant portion of invested capital actively contributes to returns, reducing long-term erosion and fostering portfolio growth. Additionally, these funds provide instant diversification across various companies and sectors, spreading risk and mitigating the impact of underperforming individual stocks.

Index funds usually aim for consistent performance by tracking their underlying indices closely, delivering predictable returns over time. These funds' passive management, low turnover, and tax efficiency lead to lower expenses and taxes compared to actively managed counterparts, making them an attractive option for long-term investors seeking to save money on fees.

Despite these advantages, it's crucial to acknowledge that index funds are not without market risks. Holding 90% of one's portfolio in equities can only diversify one to a certain degree. In fact, weighted indexes may slant heavier towards larger companies, concentrating holdings. Without active management, passive funds simply strive to match index returns, potentially leaving returns on the table.

Putting 90/10 to the Test

One Spanish finance professor went to work to find the answer. In a published research paper, Javier Estrada ofIESEBusiness School took a hypothetical $1,000 investment composed of 90% stocks and 10% short-term Treasuries. Using historical returns he tracked how the $1,000 would do over a series of overlapping 30-year time intervals. Beginning with the 1900 to 1929 period and ending with 1985 to 2014, he collected data on 86 intervals in all.

To maintain a more-or-less constant 90/10 split, the funds were rebalanced once a year. In addition, he assumed an initial 4% withdrawal each year, which was increased over time to account for inflation.

One of the key metrics Estrada looked for was the failure rate, defined as the percentage of time periods in which the money ran out before 30 years, the length of time for which some financial planners suggest retirees plan. As it turned out, Buffett’s aggressive asset mix was surprisingly resilient, failing in only 2.3% of the intervals tested.

What’s equally surprising is how this portfolio of 90% stocks fared during the five worst time periods since 1900. Estrada found that the nest egg was only slightly more depleted than a much more risk-averse 60% stock and 40% bond allocation.

Is Warren Buffett’s 90/10 Asset Allocation Sound? (1)

As one might expect, the potential gains for such a stock-heavy portfolio surpassed those of more conservative asset mixes. Not only did the 90/10 allocation do a good job of guarding against downside risk; it also resulted in strong returns.

According to Estrada’s research, the safest asset mix was actually 60% stocks and 40% bonds, which had a remarkable 0% failure rate. Notably, a portion of stocks any lower than that actually increases your risk, as bonds don’t typically generate enough interest to support retirees who reach an advanced age.

Loosely defined, an alternative investment is anything that may appreciate in value or generate wealth that is not stocks or bonds.

Disregarding Alternative Assets

Another investment option that is disregarding in this plan are alternative investments. Alternative investments offer several benefits to investors seeking to diversify their portfolios beyond traditional asset classes like stocks and bonds. These assets often have low correlation with traditional investments, meaning they may perform differently during various market conditions. Alternative investments may also offer the potential for higher returns. Additionally, some alternative investments can serve as a hedge against inflation since they often have intrinsic value tied to real assets like real estate, commodities, or infrastructure.

It's important to note that Buffet's 90/10 rule is rooted in simplicity. The expectation is that an investor can be appropriately diversified between the two main asset classes and do not need to take on potential additional risk to invest in alternatives. For investors who are interested in these less traditional asset classes, the 90/10 rule may not be suitable.

What Is the 90/10 Rule in Investing?

The 90/10 rule in investing is a comment made by Warren Buffett regarding asset allocation. The rule stipulates investing 90% of one's investment capital toward low-cost stock-based index funds and the remainder 10% to short-term government bonds. The strategy comes from Buffett stating that upon his death, his wife’s trust would be allocated in this method.

What Is a 70/30 Portfolio?

A 70/30 portfolio is an investment portfolio where 70% of investment capital is allocated to stocks and 30% to fixed-income securities, primarily bonds. Any portfolio can be broken down into different percentages this way, such as 80/20 or 60/40. The ideal allocation will depend on the investor’s age, risk tolerance, and financial goals.

Which ETF Does Warren Buffett Recommend?

Warren Buffett recommends a low-cost exchange-traded fund (ETF) that benchmarks the . The low-cost feature of such funds will prevent fees from eating into returns. In addition, the S&P 500 will always generate returns over the long term, and, generally, it is tough to beat the market.

The Bottom Line

Recent research suggests that retirees might be able to lean heavily on stocks without putting their nest eggs in grave danger. However, if a 90% stock allocation gives you the jitters, pulling back a little is a perfectly acceptable choice.

Is Warren Buffett’s 90/10 Asset Allocation Sound? (2024)


Is Warren Buffett’s 90/10 Asset Allocation Sound? ›

To sum it all up: yes, Buffett is a genius. Yes, his portfolio strategy is sound, but only for his estate's objectives, risk tolerance, and time horizon. For the majority of retail investors, the 90/10 is a cookie-cutter allocation masquerading as sensible investment advice under the guise of authority bias.

Is Warren Buffett's 90/10 asset allocation sound? ›

A 90/10 investment allocation is an aggressive strategy most suitable for investors with a high risk tolerance and a long time horizon. While Warren Buffett has an enviable track record as an investor, it probably isn't for everyone. Berkshire Hathaway Inc.

Why a 60 40 asset allocation is no longer reasonable for investors? ›

In 2022, as the pace of inflation and rising interest rates quickened, the traditional correlation between equities and bonds turned positive, which became a big negative for investors. A Bloomberg index tracking a 60/40 mix was down 17 per cent in 2022.

What is the 90 10 rule in trading? ›

The easiest way to do it is with the 90/10 rule. It goes like this: 90% of your contributions go to safe, boring investments like low-cost total stock market index funds. The remaining 10% is yours to play with. If you want to buy Bitcoin, buy Bitcoin.

What is the perfect asset allocation? ›

100% Asset Allocation

Another option for the best asset allocation is to use the 100% rule and build a portfolio that's either all stocks or all bonds. This rule gives you two extremes to choose from: High risk/high returns or low risk/low returns.

What is the 70/20/10 rule for trading? ›

Part one of the rule said that in the next 12 months, the return you got on a stock was 70% determined by what the U.S. stock market did, 20% was determined by how the industry group did and 10% was based on how undervalued and successful the individual company was.

What is the 70 30 rule Buffett? ›

A 70/30 portfolio is an investment portfolio where 70% of investment capital is allocated to stocks and 30% to fixed-income securities, primarily bonds. Any portfolio can be broken down into different percentages this way, such as 80/20 or 60/40.

Is the 60/40 portfolio dead? ›

Here's Why. After a disastrous 2022, it turned out not to be dead after all. The dual bear market for both stocks and bonds in 2022 created the perfect storm for the 60/40 portfolio, which had been a popular asset-allocation strategy for the past couple of decades.

What is the golden rule of asset allocation? ›

This principle recommends investing the result of subtracting your age from 100 in equities, with the remaining portion allocated to debt instruments. For example, a 35-year-old would allocate 65 per cent to equities and 35 per cent to debt based on this rule.

What is the downside of a 60/40 portfolio? ›

Inflation is the biggest risk to a 60/40 portfolio because it can trigger central bank tightening which pushes up real rates, which weighs both on equities and bonds.

What is the 5 3 1 rule in trading? ›

The 5-3-1 strategy is especially helpful for new traders who may be overwhelmed by the dozens of currency pairs available and the 24-7 nature of the market. The numbers five, three, and one stand for: Five currency pairs to learn and trade. Three strategies to become an expert on and use with your trades.

What is No 1 rule of trading? ›

Rule 1: Always Use a Trading Plan

You need a trading plan because it can assist you with making coherent trading decisions and define the boundaries of your optimal trade. A decent trading plan will assist you with avoiding making passionate decisions without giving it much thought.

Is it true that 90 of traders lose money? ›

Based on several brokers' studies, as many as 90% of traders are estimated to lose money in the markets. This can be an even higher failure rate if you look at day traders, forex traders, or options traders.

What is the best portfolio balance by age? ›

The common rule of asset allocation by age is that you should hold a percentage of stocks that is equal to 100 minus your age. So if you're 40, you should hold 60% of your portfolio in stocks. Since life expectancy is growing, changing that rule to 110 minus your age or 120 minus your age may be more appropriate.

Should a 70 year old be in the stock market? ›

Conventional wisdom holds that when you hit your 70s, you should adjust your investment portfolio so it leans heavily toward low-risk bonds and cash accounts and away from higher-risk stocks and mutual funds. That strategy still has merit, according to many financial advisors.

What is the best asset allocation for retirees? ›

At age 60–69, consider a moderate portfolio (60% stock, 35% bonds, 5% cash/cash investments); 70–79, moderately conservative (40% stock, 50% bonds, 10% cash/cash investments); 80 and above, conservative (20% stock, 50% bonds, 30% cash/cash investments).

Does asset allocation explain 40 90 or 100 percent of performance? ›

According to some well-known studies, more than 90 percent of the variability of a typical plan sponsor's performance over time is attributable to asset allocation. So, if an analyst is trying to explain the variability of returns over time, asset allocation is very important.

What might you say to someone whose reason for investing in 90% bonds and 10% stocks is that they want a 5.4% return on investment? ›

If someone wants to achieve a 5.4% return on investment by allocating 90% in bonds and 10% in stocks, it is important to understand the relationship between risk and return. While bonds historically provide more stable returns, they typically have lower returns than stocks.

What is the 80 20 investment portfolio? ›

One method for using the 80-20 rule in portfolio construction is to place 80% of the portfolio assets in a less volatile investment, such as Treasury bonds or index funds while placing the other 20% in growth stocks.

What are Warren Buffett's 5 rules of investing? ›

A: Five rules drawn from Warren Buffett's wisdom for potentially building wealth include investing for the long term, staying informed, maintaining a competitive advantage, focusing on quality, and managing risk.

Top Articles
Latest Posts
Article information

Author: Edwin Metz

Last Updated:

Views: 5861

Rating: 4.8 / 5 (78 voted)

Reviews: 93% of readers found this page helpful

Author information

Name: Edwin Metz

Birthday: 1997-04-16

Address: 51593 Leanne Light, Kuphalmouth, DE 50012-5183

Phone: +639107620957

Job: Corporate Banking Technician

Hobby: Reading, scrapbook, role-playing games, Fishing, Fishing, Scuba diving, Beekeeping

Introduction: My name is Edwin Metz, I am a fair, energetic, helpful, brave, outstanding, nice, helpful person who loves writing and wants to share my knowledge and understanding with you.