What is a 90/10 Strategy?

90/10 Strategy: The 90/10 investment strategy involves a relatively conservative investment approach where 90% of your capital is deployed into interest-bearing stock-based index funds. In contrast, the remaining 10% goes to high-risk investments.

90/10 Strategy Details

Warren Buffett invented the 90/10 investment strategy, the business mogul touting it as the approach he uses to invest for his family. This method is best suited to conservative investors, as one as the more significant 90% of your capital is invested in low-risk instruments. In comparison, 10% goes to high-risk short-term engagements, which increase returns on your portfolio.

Your overall portfolio that adopts the 90/10 system will generate higher yields over the long term since the 90% is a preservative for your investments. Any potential losses have a 10% ceiling as that’s what you’ve invested in high-risk bonds depending on their quality.

Warren Buffett professes that potential gains can be superior in any individual sector compared to investors who have employed investment managers. Using the 90/10 strategy improves your investment portfolio’s health, but that also depends on the index funds that you’ve purchased.

Example of the 90/10 Strategy

During a 2004 shareholders meeting, Warren Buffett told trustees to put 10% in short-term government bonds while the remaining bulk of their investments go to low-cost S&P 500 index funds.  He believed that superior long-term results would be achieved compared to investors looking for long-term outcomes in individuals, institutions, or pension funds and employing high-cost fund managers.

An index fund follows an index’s performance, including either exchange-traded or mutual funds. Buffet suggested that you invest 90% of your capital in an index that tracks the performance of the 500 largest publicly traded enterprises in the US, the S&P 500.

The Berkshire Hathaway CEO proposed that other 10 percent of your investment portfolio go into short-term government bonds that don’t suffer as much as stock funds when the markets become turbulent. These bonds, used to finance projects, are consistent and safe, relatively low risk, and pay lower interest rates when compared to others.

Significance of the 90/10 Strategy

Using the 90/10 strategy in its entirety or as an investment benchmark, you essentially reflect the tolerance to risk.  You can buy into short-term T-Bills or treasury bills with your high risk 10%, giving your portfolio a fixed income component.

When you’ve elected to use the 90/10 strategy with a $100,000 portfolio, you’ll direct %90,000 to an S&P index fund, while the remaining $10,000 goes towards one-year treasury bills. In this hypothetical investment scenario, employing this strategy as a benchmark earns a yield of 4% per annum.

With a lower risk tolerance level, you can adjust either part of the 90/10 equation to adopt a 30/70 or 40/60 split model if you’re sitting on the lower spectrum end.  You are also required to earmark the substantial portion of your capital investment for a safer returns environment, such as A- or better-rated short-term bonds.

Types of the 90/10 Strategy

Investors are usually advised against stocks as they grow older, and to retirement fund trustees, warren Buffett’s words were shocking. You probably adhere to the adage that you should maintain a stock percentage equal to 100 minus the number of years in your age.

For instance, if you are 30 years old, your portfolio will hold 30% in bonds and 70% in stocks, while at 60, you would have 60% in bonds and 40% in stocks. Whether the markets are performing well or not, you’ll be able to maintain slight returns while capping the unexpected losses to 10% or less.

As a rule of thumb, this strategy is supposed to allow your investment assets to age and become high-quality bonds by the time you hit 70 years. Such equities are stable and generally won’t take big hits when the market becomes uncertain.

History of the 90/10 Strategy

In 2013, warren buffet wrote his shareholders letter to Berkshire Hathaway investors, noting that his wife’s inheritance, when he passes on, will be invested in a 90/10 strategy. This approach was soon put to the test by Javier Estrada, a Spanish professor of finance at the IESE Business School.

With the use of historical returns, Javier’s hypothetical $100,000 was invested as 10% on short-term treasuries and 90% in low-risk stocks.  While his thesis spanned over theoretical series 30 year periods, 86 in total, he studied his capital gains from 1900 to 1929 and again from 1985 to 2014.

While rebalancing funds each year to maintain the 90/10 more or less constant and accounting for inflation, Professor Estrada found out that the asset mix was incredibly resilient. Besides having a failure rate of only 2.3%, defined as when 30 years reached and there was no money, the 90% of his portfolio fared well with slight depletion.

90/10 Strategy vs. 100 minus Your Age Strategy

When Warren Buffett pointed out the 90/10 strategy, he didn’t imply that this investment method will make sense to every investor. The split represents the make-up of your portfolio, while the allocated investments can either adhere precisely or vary accordingly.

The 90/10 rule contends that you’ll get higher returns through low turnover and low-cost index funds as an investor. For an individual that made a fortune picking at individual investments, this interesting admission is one that you should put into action.

Your hopes for a longer life should be coupled with a need to stretch the nest egg, and a less aggressive approach like the 90/10 strategy can work for your portfolio. 100 minus your age or even 110 or 120 can be applied appropriately to apportion your stock options, but you can’t afford to invest 90% in equities at a  later age.