90/10 Investment Strategy

Key takeaways

• Allocate 90% to low-cost stock index funds and 10% to short-term government bonds (e.g., Treasury bills).
• Popularized by Warren Buffett as a simple, low-maintenance approach for long-term growth.
• Highly aggressive compared with traditional mixes; better suited to investors with long horizons and high risk tolerance.
• Keep costs low (choose low-expense index funds), rebalance periodically, and be prepared for volatility.

What it is

The 90/10 strategy calls for putting 90% of investable capital into broad, low-cost stock index funds (commonly an S&P 500 fund) and 10% into short-term government bonds or cash equivalents (commonly Treasury bills). It emphasizes equity-driven growth while maintaining a small ballast of very safe assets.

Origin

The approach gained wide attention after Warren Buffett stated in a 2013 letter that it’s his recommended allocation for a trust: 90% in a very low-cost S&P 500 index fund and 10% in short-term government bonds.

How it works (mechanics and example)

• Stocks provide the growth component; the stocks portion will largely determine long-term returns.
• Short-term government bonds (T-bills) provide liquidity and capital preservation for the small defensive slice.

Example: If the S&P 500 returns 10% in a year and T-bills return 4%:
Overall return = 0.90 × 10% + 0.10 × 4% = 9.4%

ETFs and index mutual funds are common vehicles for the stock portion; T-bills can be bought directly, via brokers, or through bond funds/ETFs for the bond portion.

How to implement

• Choose a broad, low-cost index fund or ETF (S&P 500 or total-market) for the 90% equity allocation.
• Use short-term Treasury bills, a T-bill fund, or high-quality short-term government bond funds for the 10% defensive allocation.
• Prefer no-load funds and discount brokers to avoid sales commissions.
• Compare expense ratios — lower is generally better for index funds that should closely track the underlying index.

Minimizing costs

• Use passively managed index funds or ETFs to avoid high management fees.
• Check annual expense ratios; small differences compound over time.
• Avoid funds with sales loads or high transaction fees; buy directly from fund companies or through low-cost brokers.

Risks and criticisms

• High volatility: With 90% in stocks, the portfolio can suffer large short-term drawdowns during market downturns.
• Emotional risk: Investors must be willing and able to hold through severe market stress; otherwise they may sell at the worst time.
• Not ideal for near-retirees or conservative investors who prioritize capital preservation or income.
• Critics note that age-based rules (e.g., allocating 110 minus your age to stocks) may better match risk tolerance as you approach retirement.

Alternatives

• 60/40 portfolio: 60% equities, 40% bonds — more conservative, historically less volatile, and designed to produce steadier returns and income.
• Age-based allocations: Adjust stock exposure downward with age (rules using 100, 110, or 120 minus age).
• Glide-path target-date funds: Automatically reduce stock exposure as a target retirement date approaches.

Who the 90/10 strategy suits

• Long-term investors (decades until withdrawal) who can ride out market cycles.
• High risk tolerance: comfortable with large interim losses for the chance of higher long-term gains.
• DIY investors who want a simple, low-maintenance allocation.
• Those confident in the long-term growth of equities and willing to rebalance.

Rebalancing guidance

• Rebalance periodically (commonly annually) or when allocations deviate beyond set thresholds (for example, rebalance if equity weight drifts above 95% or below 85%).
• Rebalancing enforces discipline: selling some equities after runs and buying when equities fall.

Bottom line

The 90/10 strategy is a straightforward, equity-heavy allocation aimed at maximizing long-term growth while keeping a minimal safety cushion. It can produce strong long-term returns but brings substantial short-term volatility. It is most appropriate for investors with long horizons and high tolerance for market swings; otherwise, more conservative allocations or age-adjusted approaches may be preferable.