90/10 Investing Strategy: Definition, How It Works, Pros & Cons

What Is the 90/10 Strategy?

Legendary investor Warren Buffett proposed the "90/10" strategy in his 2013 chairman's letter to Berkshire Hathaway shareholders. The strategy calls for putting 90% of one's investment capital into low-cost stock index funds and the remaining 10% in low-risk government bonds.

It differs from many common investing strategies that suggest lower percentages of stocks and higher percentages of bonds, especially as the investor gets older.

How the 90/10 Strategy Works

For decades now, Warren Buffett's annual chairman's letters have been eagerly awaited by his shareholders and countless investors eager to emulate his success. His 2013 letter covered a variety of topics, with a single paragraph devoted to the 90/10 strategy. Nonetheless, that was sufficient to bring it to wide attention, which continues to this day. Here is what he had to say:

My money, I should add, is where my mouth is: What I advise here is essentially identical to certain instructions I've laid out in my will. One bequest provides that cash will be delivered to a trustee for my wife's benefit. (I have to use cash for individual bequests, because all of my Berkshire shares will be fully distributed to certain philanthropic organizations over the ten years following the closing of my estate.) My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard's.) I believe the trust's long-term results from this policy will be superior to those attained by most investors—whether pension funds, institutions, or individuals—who employ high-fee managers.

An Example of the 90/10 Strategy

An investor with a $100,000 portfolio who wants to employ a 90/10 strategy could invest $90,000 in an S&P 500 index mutual fund or exchange-traded fund (ETF), with the remaining $10,000 going toward Treasury bills.

Treasury bills, or T-bills, are short-term debt issued by the federal government with maturities of up to one year. They can be purchased directly from the government, through brokers, or in the form of a mutual fund or an ETF. Like Treasury notes and bonds, which have longer maturities, they are generally considered the safest of all investments.

To calculate the performance of a 90/10 portfolio, you would multiply each portion by its return for the year. For example, if the S&P 500 returned 10% for the year and Treasury bills paid 4%, the calculation would be 0.90 x 10% + 0.10 x 4%, resulting in a 9.4% return overall.

Keeping Fees to a Minimum

One reason Buffett advocates investing through index funds is that they typically have rock-bottom costs. That's because they are passively managed. Rather than employ investment managers to make decisions on which stocks to buy and when to sell them, these funds simply try to replicate a particular stock index like the S&P 500, which is based on the stocks of 500 major U.S. corporations.

In addition, numerous studies have shown that few investment managers can beat the performance of an index in any given year and fewer still can do it year after year.

That doesn't mean all index funds are alike. Some do a better job than others at keeping their costs down. So in choosing among S&P 500 index funds, you should consider both their performance (which is likely to be pretty close) and their annual expense ratios (which may be significantly different). All else being equal, a fund with a lower expense ratio will be a better deal.

In addition, some mutual funds, typically sold through brokers, charge sales commissions, or loads, when you invest. That will immediately take a cut out of your investment. You can avoid commissions by buying no-load funds directly from the fund company or from a discount broker that offers them.

Criticisms of the 90/10 Strategy

The primary criticism of a 90% stock and 10% bond allocation is its high risk and potential for extreme volatility. By contrast, another well-known strategy suggests subtracting your age from 110 and putting that percentage into stocks, with the rest going into bonds. At age 40, for example, that would mean 70% stocks, 30% bonds. At age 65, it would be 45% stocks, 55% bonds. (Similar guidelines use 100 or 120 in place of 110.)

With such a heavy concentration in stocks, the 90/10 portfolio is exposed to market fluctuations and can experience significant short-term losses during market downturns. This can be emotionally challenging for investors and may not be suitable for those with a low risk tolerance or a shorter investment horizon.

As financial writer Walter Updegrave put it in a 2018 column, "what I believe is the major question anyone thinking of adopting this strategy needs to resolve before adopting it: Will you be willing, and able, to stick with such an aggressive stocks-bonds mix when the markets are in turmoil or even in the midst of a harrowing tailspin?"

That's an especially pertinent question for anyone nearing, or already in, retirement.

Alternatives to the 90/10 Investing Strategy

The 90/10 strategy contrasts with the more traditional 60/40 portfolio, which allocates 60% to equities and 40% to bonds. Both strategies aim to balance growth and risk, but they do so in different ways.

The 60/40 portfolio has long been the go-to model for investors seeking a balanced approach. By spreading investments across both stocks and bonds more evenly, it aims to provide steady growth while reducing volatility. The bonds in a 60/40 portfolio are intended to act as a larger buffer during market downturns, cushioning the impact of stock market declines. This strategy has historically been favored by investors who want a moderate level of risk and are looking for a mix of income and capital appreciation.

One of the key differences between the two strategies is how they handle market risk. The 60/40 portfolio tends to be more conservative. The 90/10 strategy is more aggressive, with a stronger emphasis on growth, which can lead to higher returns over time but also comes with greater short-term risk. Investors holding a 90/10 allocation are embracing the risk as a profit opportunity, while investors holding a 60/40 allocation are shying away from risk a little more.

Who the 90/10 Investing Strategy Is For

Here are the types of investors best suited for the 90/10 strategy:

• Long-Term Investors: The 90/10 strategy is ideal for individuals with a long investment horizon, such as those in their 20s, 30s, or 40s who are saving for retirement. These investors have time on their side, allowing them to ride out market volatility and benefit from the long-term growth potential of equities.
• Investors with High Risk Tolerance: The 90/10 strategy best suits those who can comfortably endure market fluctuations and are not easily rattled by short-term losses. By accepting a higher level of risk by investing heavier in equities, they position themselves for potentially higher returns compared to more conservative strategies like the 60/40 portfolio.
• DIY Investors: The simplicity of the 90/10 strategy makes it attractive to self-directed investors who prefer a hands-off approach. With 90% invested in low-cost index funds and 10% in cash or bonds, this strategy requires minimal maintenance and is easy to implement.
• Investors with Confidence in Market Growth: Individuals who strongly believe in the stock market's long-term growth are well-suited for the 90/10 strategy. They are optimistic about the economy's future and the potential for continued innovation and corporate profitability (which they assume will be captured via stock price appreciation).

The Bottom Line

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.