Warren Buffet's 90/10 Investing Rule: Does It Work?
The 90/10 Rule Can Be Ideal For Younger Investors, But Isn’t The Best For Retirees
In his 2013 letter to investors, Buffet first popularized his 90/10 rule, which states that most investors should invest 90% in low-cost equity (stock) ETFs and 90% in short-term Treasury ETFs. In this article, we’ll look at the 90/10 strategy, how it works, and if it’s a sound investing strategy. We’ll also discuss which types of investors 90/10 is right for and who might want to avoid (or significantly alter) the 90/10 strategy.
Overall, we can safely say that the 90/10 strategy can work well over very long time periods, and for people during the wealth accumulation process, but it may simply be far too risky for older investors and retirees.
What Buffet Says About The 90/10 Strategy
In his 2013 shareholder letter, Buffet says this about the 90/10 strategy:
“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.”
Common 90/10 Options: S&P 500 ETFs and Short-Term Treasury ETFs
For those who may not know, S&P 500 ETFs track the largest 500 U.S. companies by market cap, while short-term Treasury ETFs purchase short-term Treasury Bonds from the U.S. government. Short-term Treasury Bonds are generally considered the safest form of bonds, as the value of the bond itself generally doesn’t fluctuate much. Therefore, you can earn a (nearly) risk-free return on your money.
When investing in ETFs, looking at fees (expense ratios) is essential, as management fees can significantly cut into returns. For instance, utilizing a fund with the same return with a 0.03% expense ratio vs. a 0.4% expense ratio leads to significantly higher investor returns.
For example, if we take the S&P 500’s approximate 40-year return of around 10.8%, an investor who placed $10,000 in a fund with almost no fees would have $216,000 after 30 years, while they’d only have $194,000 if they had invested in a fund with a 0.4% expense ratio (reducing their return to 10.4%). That’s a potential investment loss of around 11%.
What Are Typical Investment Returns From a 90/10 Strategy?
Investment returns from a 90/10 strategy can vary significantly based on the period and the specific ETFs the investor chooses.
In a straightforward and long-term backtest, we can take a portfolio based on 90% U.S. large-cap stocks using data from 1977 (which had a return of 10.71%) and short-term Treasury bonds (which had a return of 5.36%. This portfolio would have had an impressive annual return of 10.92%.
However, as we’ll get to later in the article, the 90/10 strategy would not have achieved the best investment returns during specific periods, such as during 2000-2010.
What Are The Benefits and Risks of The 90/10 Strategy?
Below, I detail some of the most obvious benefits and risks of the 90/10 strategy:
Benefits:
Growth Potential: High portfolio growth potential due to a high level of exposure to stocks.
Passive Investment: Investing in ETFs can be very passive; only an annual portfolio rebalancing is required to maintain the 90/10 stock/bond ratio.
Simplicity: The 90/10 strategy is extremely simple, and doesn’t require significant research or portfolio changes.
Risks:
Downside Loss: While a high level of exposure to stocks can bring greater growth, it also can lead to significant losses in down markets.
Risky for Retirees: Since the 90/10 strategy has so much potential downside, it’s likely not ideal for those in retirement or those retiring soon (i.e., in the next 10 years or so). This is partially due to sequence of returns risk, which means that investors who suffer large portfolio losses in the early years of retirement while still taking withdrawals may never see their portfolio fully recover.
The Best ETFs for The 90/10 Strategy
Here are some common ETFs that can be used for the 90/10 Strategy:
Stock Market/S&P 500 ETFs:
SPDR S&P 500 Trust ETF (SPY), Expense Ratio: 0.09%
iShares Core S&P 500 ETF (IVV), Expense Ratio: 0.03%
Vanguard S&P 500 ETF (VOO), Expense Ratio: 0.03%
Short-Term Treasury ETFs:
SPDR Bloomberg 1-3 Month T-Bill ETF (BIL), Expense Ratio: 0.14%
iShares 0-3 Month Treasury Bond ETF (SGOV), Expense Ratio: 0.09%
Vanguard Short-Term Treasury Index Fund (VGSH), Expense Ratio: 0.04%
Backtesting The 90/10 Strategy During Different Periods
Below, we’ll show some charts and discuss how the 90/10 strategy would have performed during periods and under differing circumstances.
90/10 Portfolio Returns (1977 to mid-2024)
In the long-term, this worked out quite well, but it didn’t always work well, especially during 2000-2010, when it would have returned a measly 1.02%, as shown in the chart below.
90/10 Portfolio Returns (2000 to 2010)
However, this assumes the investor put in a lump sum and didn’t engage in a strategy like dollar cost averaging (DCA). If an investor's dollar cost averaged into this portfolio and rebalanced each year, they’d get a more reasonable return of around 7.5%, as shown in the chart below.
90/10 Dollar Cost Averaging Portfolio (2000 to 2010)
So, whether 90/10 is a good idea depends on whether you’re investing a lump sum of money or consistently contributing to your portfolio.
Wait: What ETFs?
In the sample above, we’ve used general large-cap stock returns as our model for the 90/10 strategy, which can easily be achieved by using popular ETFs like SPY, the largest S&P 500 ETF.
However, investors aren’t limited to simply investing in S&P 500 ETFs; there are many options, including sector ETFs, mid and small-cap ETFs, international ETFs, and actively managed ETFs (including value investing ETFs).
Some of these ETFs would have performed significantly better (or worse) than the S&P 500 during both the stress period of 2000-2010 as well as for the larger 47-year period mentioned above (though ETFs didn’t exist back then, individuals could invest in mutual funds with very similar returns).
For instance, during 2007-2011 (after the 2008 and great financial crisis), sector ETFs focused on certain core industries, such as pharmaceuticals, energy, and consumer products, significantly outperformed ETFs based on large market indexes like the S&P 500. However, in recent years, these types of sector ETFs have performed substantially worse than the S&P 500.
The 90/10 Rule Often Won’t Work Well For Most Retirees
While the 90/10 rule may work well for younger investors and high-net-worth individuals with very long timelines and little need to withdraw, it’s far from a good strategy for most retirees. In most scenarios, the average retiree would be much better off with a traditional 60/40 portfolio allocation to shield themselves from market crashes and downside risk.
For example, for the years 2000-2010, a 60/40 portfolio consisting of 60% U.S. large-cap stocks and 40% short-term Treasury bonds would have significantly outperformed (and be significantly more stable) than a 90/10 portfolio, returning 2.73% per year compared to 1.02% for the 90/10 strategy. Most importantly, investors would have never seen their portfolio fall beyond 20% in any one year, which is extremely important for investors who take withdrawals to pay retirement expenses.
60/40 Portfolio (2000-2010)
Sequence of Returns Risk and Withdrawal Rate
As we’ve touched upon previously, the real risk for retirees and older investors when utilizing a 90/10 portfolio is a sequence of returns risk. This is the risk that investment losses during the early part of retirement, when an investor starts taking withdrawals, will lead to permanent investment losses and a significantly reduced retirement portfolio.
If we use a non-inflation-adjusted 4% withdrawal rate for a typical 90/10 portfolio from 2000-2010, the annual return would have been -6.02%, leaving the investor’s portfolio (in 2010) at less than half the amount they started with in 2000. This could completely wreck someone’s retirement.
90/10 Portfolio (2000-2010) (4% Withdrawal Rate)
In contrast, below, we see what would happen with a 60/40 portfolio. Unfortunately, the rate of return would still be negative, at -2.13%, but an investor would still only lose around 22% of their portfolio value by 2010, which is a massive difference from the 90/10 portfolio.
60/40 Portfolio 2000-2010 (4% Withdrawal Rate)
In Conclusion: 90/10 Can Be A Great Strategy, But It’s Not For Everyone
In the end, Warren Buffet’s 90/10 strategy is straightforward and effective for most people in the accumulation phase-- when they continue adding funds to their portfolio. However, it has significant downsides for those living on a fixed portfolio and can be highly risky for retirees.
