90/10 Strategy

Legendary investor Warren Buffett invented the “90/10" investing strategy for the investment of retirement savings. The method involves deploying 90% of one's investment capital into interest-bearing instruments which present a lower degree of investment risk while allocating the remaining 10% of money towards higher-risk investments. This system is a relatively conservative investment strategy which aims to generate higher yields on the overall portfolio. Following this method, proponents profess the potential losses will typically be limited to the 10% invested in the high-risk investments. However, much depends on the quality of the interest-bearing bonds purchased.

• This strategy hedges against potentially devastating, during market slumps.
• This methodology is also known as the “90/10 Crash Protection strategy”.
• Some recommend the method for individuals nearing retirement, who must retain their savings.

A typical application of the 90/10 strategy involves the use of short-term Treasury Bills for the 90%, fixed-income component of the portfolio. Investment of the remaining 10% is in higher risk securities such as equity, index options or warrants.

For example, an investor with a US$100,000 portfolio electing to employ a 90/10 strategy, might invest $90,000 in one-year Treasury Bills which yield 4% per annum. The remaining $10,000 goes either towards equities or stocks listed in the S&P 500 or to an index fund.

Of course, the “90/10” rule is merely a suggested benchmark, which may be easily modified to reflect a given investor’s tolerance to investment risk. Investors with higher risk tolerance levels can adjust greater equity portions to the equation. For instance, an investor who sits at the upper end of the risk spectrum may adopt a 70/30 or even 60/40 split model. The only requirement is that the investor earmarks the more substantial portion of the portfolio funds for safer investments, such as shorter-term bonds which have an A- or better rating.

To calculate the returns on such a portfolio, the investor must multiply the allocation by the return and then add those results. Using the example above, if the S&P 500 returns 10% at the end of one year, the calculation is (0.90 x 4% + 0.10 x 10%) resulting in a 4.6% return.

However, if the S&P 500 declines by 10%, the overall return on the portfolio after one year would be 2.6% using the calculation (0.90 x 4% + 0.10 x -10%).

Buffet not only advocates for the 90/10 plan in theory, but he actively puts this principle into practice as reported by Fortune Magazine. Most notably, as a trust and estate planning directive for his wife, as laid out in his will. He once explained,

“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. 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. And the reason for the 10% in short-term governments is that if there’s a terrible period in the market and she’s withdrawing 3% or 4% a year, you take it out of that instead of selling stocks at the wrong time. She’ll do fine with that. It’s low-cost, it’s in a bunch of wonderful businesses, and it takes care of itself.”