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)

FAQs

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.

What is the 90 10 strategy of Buffett? ›

Warren Buffet's 2013 letter explains the 90/10 rule—put 90% of assets in S&P 500 index funds and the other 10% in short-term government bonds.

What is the average return of the 90 10 portfolio? ›

The Bill Bernstein Sheltered Sam 90/10 Portfolio obtained a 8.92% compound annual return, with a 13.71% standard deviation, in the last 30 Years. The Warren Buffett Portfolio obtained a 10.09% compound annual return, with a 13.63% standard deviation, in the last 30 Years.

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 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 Buffett's two list rule? ›

Buffett presented a three-step exercise to help streamline his focus. The first step was to write down his top 25 career goals. In the second step, Buffett told Flint to identify his top five goals from the list. In the final step, Flint had two lists: the top five goals (List A) and the remaining 20 (List B).

What is Warren Buffett 70 30 rule? ›

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.

What is the best asset allocation for retirement? ›

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).

What is the 80 20 portfolio strategy? ›

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 is Warren Buffett's Sharpe ratio? ›

Two Other Factors Boosted Buffett's Performance

The AQR researchers found that Berkshire Hathaway's Sharpe Ratio (a measure of returns after adjusting for risk) is 0.79 from 1976-2017. That's about twice that of the broad market, but it's not spectacular.

What is a realistic portfolio return? ›

The average stock market return is about 10% per year, as measured by the S&P 500 index, but that 10% average rate is reduced by inflation. Investors can expect to lose purchasing power of 2% to 3% every year due to inflation. » Learn more about purchasing power with NerdWallet's inflation calculator.

What should my portfolio look like at 55? ›

As you reach your 50s, consider allocating 60% of your portfolio to stocks and 40% to bonds. Adjust those numbers according to your risk tolerance. If risk makes you nervous, decrease the stock percentage and increase the bond percentage.

Is the Vanguard 60 40 portfolio dead? ›

The long-popular 60% stocks-40% bonds portfolio remains alive and well and has proved to be successful despite a rough 2022, according to a key Vanguard Group researcher.

What is the most successful asset allocation? ›

If you are a moderate-risk investor, it's best to start with a 60-30-10 or 70-20-10 allocation. Those of you who have a 60-40 allocation can also add a touch of gold to their portfolios for better diversification. If you are conservative, then 50-40-10 or 50-30-20 is a good way to start off on your investment journey.

What is the best portfolio allocation 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.

What asset allocation does Warren Buffett recommend? ›

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.

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

In summary, our analysis shows that asset allocation explains about 90 percent of the variability of a fund's returns over time but explains only about 40 percent of the variation of returns among funds.

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? ›

Answer: Investing in 90% bonds and 10% stocks will provide an average return of 6% on investment.It is advisable to invest more portion in bonds is safe and will give higher return for investment than stocks.

What are the Warren Buffett's first 3 rules of investing money? ›

What are Warren Buffett's biggest investing rules?
  • Rule 1: Never lose money. This is considered by many to be Buffett's most important rule and is the foundation of his investment philosophy. ...
  • Rule 2: Focus on the long term. ...
  • Rule 3: Know what you're investing in.
Mar 6, 2024

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