90/10 Strategy

What Is a 90/10 Strategy?

A 90/10 strategy is an asset allocation approach in which roughly 90 percent of an investment portfolio is held in stocks and about 10 percent is held in low-risk, short-term assets such as government bonds or cash equivalents. The stock portion is often placed in a broad, low-cost index fund that tracks a market benchmark such as the S&P 500. The smaller portion is kept in safer holdings to reduce the overall swings in portfolio value.

How It Works

The split is a simple ratio. In a hypothetical portfolio of 10,000 currency units, 9,000 would be held in a stock index fund and 1,000 in short-term Treasury securities. Because stocks usually fluctuate more than bonds, the actual mix drifts over time. For example, a strong stock market could raise the stock share to 95 percent. Investors who follow this approach often perform rebalancing, which means selling some of the asset that has grown and buying more of the one that has shrunk, to restore the original 90/10 target.

Origins and the Buffett Bet

Warren Buffett, chairman of Berkshire Hathaway, has described a mix of an S&P 500 index fund and short-term government bonds, in roughly this proportion, as a sensible option for many ordinary investors. He discussed the idea in letters to Berkshire shareholders. In 2007 he also made a public ten-year wager that an S&P 500 index fund would outperform a group of funds that invested in other hedge fund portfolios chosen by professional managers. The index fund came out ahead, and the result is often cited as evidence for low-cost passive investing.

Advantages and Drawbacks

The strategy is easy to understand and maintain, and its high stock allocation aims for long-term growth. The bond portion adds some stability and diversification across asset types, which can soften declines compared with an all-stock portfolio.

The drawbacks are significant. A 90 percent stock allocation still experiences large losses during market downturns, and the level of volatility can be hard to tolerate in practice. The bond portion may also lag stocks during strong rallies. The approach does not account for individual factors such as time horizon, income needs, or other savings, so its suitability depends heavily on personal circumstances.