The 90/10 investing strategy is an asset allocation strategy famously recommended by Warren Buffett for the average investor.
It is a simple, two-fund portfolio with the following allocation:
- 90% of your investment capital should be put into a low-cost S&P 500 index fund (to capture long-term growth potential).
- 10% of your investment capital should be put into short-term government bonds (to provide stability and a cash cushion during market downturns).
Key Rationale and Features:
- Simplicity and Low Cost: The strategy is easy to implement and maintain, typically requiring only two low-cost index funds, which minimizes management fees.
- Long-Term Growth: The heavy allocation to the S&P 500 is designed to benefit from the historical long-term growth of the stock market.
- Risk Management: The 10% in short-term bonds is intended to provide liquidity and a less volatile asset to draw from during stock market declines, preventing the investor from having to sell stocks at a loss.
- Suitability: It is considered an aggressive allocation due to the high stock exposure, making it generally more suitable for investors with a long investment horizon (e.g., young people saving for retirement) and a high tolerance for risk.
Buffett mentioned this specific allocation in his 2013 letter to Berkshire Hathaway shareholders, stating it was the instruction he had laid out in his will for the cash left to his wife.