When most people challenge deeply ingrained wisdom about finances, they’re greeted with eye rolls. When one of the world’s most successful financial gurus is the contrarian, people listen.
Such was the case with Warren Buffett’s 2013 letter to Berkshire Hathaway investors, which seemed to challenge one of the longstanding axioms about retirement planning. Buffett noted that, upon his passing, the trustee of his wife’s inheritance was instructed to put 90% of her money into a very low-fee stock index fundand 10% into short-term government bonds. This is what is called the "90/10 investing strategy."
Key Takeaways
In a 2013 letter to Berkshire Hathaway shareholders, Warren Buffett noted an investment plan for his wife that seemed to contradict what many experts suggest for retirees.
He wrote that after he passes, the trustee of his wife's inheritance has been told to put 90% of her money into a stock index fundand 10% into short-term government bonds.
Most often, investors are told to scale back on their percentage of stocks and increase their high-quality bonds as they age, so as to better protect them from potential market downturns.
A Spanish finance professor put Buffett's plan to the test, looking at how a hypothetical portfolio set for 90/10 would have performed historically, and found the results were very positive.
Against the Norm
For investors regularly told to steer away from stocks as they age, this was pretty shocking stuff. A well-worn adage is to maintain a percentage of stocks equal to 100 minus one’s age, at least as a rule of thumb. So when you hit the age of, say, 70, most of your investment assets would be high-quality bonds that generally don’t take as big a hit during market downturns.
100 Minus Your Age
The rule of thumb advisors have traditionally urged investors to use, in terms of the percentage of stocks an investor should have in their portfolio; this equation suggests, for example, that a 30-year-old would hold 70% in stocks, 30% in bonds, while a 60-year-old would have 40% in stocks, 60% in bonds.
Because people are generally living longer and need to stretch their nest eggs, some experts have suggested being a little more aggressive. Now, it’s more common to hear about 110 minus your age, or even 120 minus your age, as an appropriate portion of stocks. But 90% in equities, at any age? Even for someone with Buffett’s bona fides, that seems like a risky proposition.
Will It Work for Every Investor?
Now, it’s important to point out that the Oracle of Omaha didn’tsay that the 90/10 split makes sense for every investor. The larger point he was trying to make was about the makeup of portfolios, not the precise allocation. His main contention was that most investors will get better returns through low-cost, low-turnover index funds, an interesting admission for someone who’s made a fortune picking individual stocks.
And there’s an obvious distinction between Mrs. Buffett and most investors. While we don’t know the exact amount of her bequest, one can assume she’ll get a cushy nest egg. She can likely afford to take on a little more risk and still live comfortably. Still, this 90/10 allocation drew considerable attention from the investing community. But just how well would such a mix of stocks and bonds hold up in the real world?
Putting 90/10 to the Test
One Spanish finance professor went to work finding the answer. In a published research paper, Javier Estrada ofIESEBusiness School took a hypothetical $1,000 investment comprising of 90% stocks and 10% short-term Treasuries. Using historical returns, he tracked how the $1,000 would do over a series of overlapping 30-year time intervals. Beginning with the 1900–1929 period and ending with 1985–2014, he collected data on 86 intervals in all.
To maintain a more-or-less constant 90/10 split, the funds were rebalanced once a year. In addition, he assumed an initial 4% withdrawal each year, which was increased over time to account for inflation.
One of the key metrics Estrada looked for was the failure rate, defined as the percentage of time periods in which the money ran out before 30 years, the length of time some financial planners suggest retirees plan for. As it turned out, Buffett’s aggressive asset mix was surprisingly resilient, “failing” in only 2.3% of the intervals tested.
What’s equally surprising is how this portfolio of 90% stocks fared during the five worst time periods since 1900. Estrada found that the nest egg was only slightly more depleted than a much more risk-averse 60% stock and 40% bond allocation.
Estrada tested the failure rate of various asset mixes over 86 different historical periods. An asset allocation failed when the funds ran out before 30 years, assuming a fairly typical amount of withdrawals.
As one might expect, the potential gains for such a stock-heavy portfolio surpassed those of more conservative asset mixes. So, not only did the 90/10 allocation do a good job of guarding against downside risk, but it also resulted in strong returns.
According to Estrada’s research, the safest asset mix was actually 60% stocks and 40% bonds, which had a remarkable 0% failure rate. But a portion of stocks any lower than that actually increases your risk, since bonds don’t typically generate enough interest to support retirees who reach an advanced age.
What Is the 90/10 Rule in Investing?
The 90/10 rule in investing is a comment made by Warren Buffett regarding asset allocation. The rule stipulates investing 90% of one's investment capital towards low-cost stock-based index funds and the remainder 10% to short-term government bonds. The strategy comes from Buffett stating that upon his passing, his wife's trust would be allocated in this method.
What Is a 70/30 Portfolio?
A 70/30 portfolio is an investment portfolio where 70% of investment capital is allocated to stocks and 30% to fixed-income securities, primarily bonds. Any portfolio can be broken down into different percentages this way, such as 80/20 or 60/40. The ideal allocation will depend on the investor's age, risk tolerance, and financial goals.
Which ETF Does Warren Buffett Recommend?
Warren Buffett recommends a low-cost ETF that benchmarks the S&P 500. The low-cost feature of such funds will prevent fees from eating into returns. In addition, the S&P 500 will always generate returns over the long term, and generally, it is tough to beat the market.
The Bottom Line
Recent research suggests that retirees might be able to lean heavily on stocks without putting their nest eggs in grave danger. But if a 90% stock allocation gives you the jitters, pulling back a little might not be such a bad idea.
What is Warren Buffet's retirement investment advice? Buffett recommends a long-term portfolio allocated 90% to S&P 500 index funds and 10% to diversified short-term bond funds for most investors.
What is Warren Buffet's retirement investment advice? Buffett recommends a long-term portfolio allocated 90% to S&P 500 index funds and 10% to diversified short-term bond funds for most investors.
What Is the 90/10 Rule in Investing? The 90/10 rule in investing is a comment made by Warren Buffett regarding asset allocation. The rule stipulates investing 90% of one's investment capital towards low-cost stock-based index funds and the remainder 10% to short-term government bonds.
A 70/30 portfolio signifies that within your investments, 70 percent are allocated to stocks, with the remaining 30 percent invested in fixed-income instruments like bonds.
For example, if you're 30 years old, subtracting your age from 120 gives you 90. Therefore, you would invest 90% of your retirement money in stocks and 10% into more consistent financial instruments. This rule creates a portfolio that gradually carries less risk.
Warren Buffett once said, “The first rule of an investment is don't lose [money]. And the second rule of an investment is don't forget the first rule. And that's all the rules there are.”
High-net-worth families have 31% of their assets in listed equities, which make up the largest portion of their investments, according to KKR's survey. Private equity is next, with high-net-worth families allocating 27% of their assets towards this type of alternative investment.
Many financial experts herald the 90/10 rule as an excellent investment strategy for retirees, especially if they want to generate higher yields in long-term portfolios.
Most investors would view an average annual rate of return of 10% or more as a good ROI for long-term investments in the stock market. However, keep in mind that this is an average.
A general rule of thumb for how much of your investment portfolio should be cash or cash equivalents range from 2% to 10%, although this very much depends on your individual circ*mstances.
In investing, the 80-20 rule generally holds that 20% of the holdings in a portfolio are responsible for 80% of the portfolio's growth. On the flip side, 20% of a portfolio's holdings could be responsible for 80% of its losses.
For normal investors with small amounts of capital in their brokerage accounts a maximum of six stocks can be all the diversification you need if they are in different industries and you have researched their fundamentals, price action, and historical trends.
80% of your portfolio's returns in the market may be traced to 20% of your investments. 80% of your portfolio's losses may be traced to 20% of your investments. 80% of your trading profits in the US market might be coming from 20% of positions (aka amount of assets owned).
While you may not have much money to invest at first, in some ways you can think of that as an advantage. Experts say now is the time to be aggressive, with 85% to 90% of your investments in stocks, and 10% to 15% in bonds.
According to this rule of thumb, a business' combined growth rate and profit margin should be over 40% to be considered attractive by investors and acquirers.
These are: invest within your circle of competence, think like a business owner when buying equities, and buy at inexpensive prices to provide a margin of safety. From 1965 through 2017, CNBC calculates that shares of Buffett's Berkshire Hathaway Inc.
A high-net-worth individual (HNWI) is someone with liquid assets of at least $1 million. These individuals often seek the assistance of financial professionals to manage their money, and their high net worth qualifies them for additional benefits and investing opportunities that are closed to most.
People with the top 1% of net worth (opens in new tab) in the U.S. in 2022 had $10,815,000 in net worth. The top 2% had a net worth of $2,472,000. The top 5% had $1,030,000. The top 10% had $854,900.
Somewhere around 4,473,836 households have $4 million or more in wealth, while around 3,592,054 have at least $5 million. Respectively, that is 3.48% and 2.79% of all households in America.
How Much Does the Average 70-Year-Old Have in Savings? According to data from the Federal Reserve's most recent Survey of Consumer Finances, the average 65 to 74-year-old has a little over $426,000 saved. That's money that's specifically set aside in retirement accounts, including 401(k) plans and IRAs.
With $5 million you can plan on retiring early almost anywhere. While you should be more careful with your money in extremely high-cost areas, this size nest egg can generate more than $100,000 per year of income. That should be more than enough to live comfortably on starting at age 55.
Suggested savings: The general guidelines recommend having eight times your annual salary saved by 60. The median income for a 55-year-old is about $57,500, which means having $460,000 saved for retirement. The average savings for those 55-65 is $197,322.
The 3-6-3 rule describes how bankers would supposedly give 3% interest on their depositors' accounts, lend the depositors money at 6% interest, and then be playing golf by 3 p.m. In the 1950s, 1960s, and 1970s, a huge part of a bank's business was lending out money at a higher interest rate than what it was paying out ...
The 10X rule means investing ten times more and reaching ten times further. Perusing the shelves of your average bookstore, you're bound to find a plethora of titles that promise you the secrets to a successful life. But with so many options, it can be hard to know which is the best one.
Nearly 80% of this amount is held in US treasury Bills and that means Berkshire alone holds 0.5% of the total treasury bills issued by the US government. To quote Buffett, “Cash holdings are nearly 20% of overall investment holdings of Berkshire Hathaway, which is almost the peak cash holding at any time in the past.
For example, an investor with a $100,000 portfolio electing to employ a 90/10 strategy might invest $90,000 in an S&P 500 index fund. The remaining $10,000 might go toward one-year Treasury Bills, which in our hypothetical scenario yield 4% per annum.
Buffett, 92, takes a different tack than virtually all other major insurers by investing heavily in stocks and holding a lot of cash in the form of Treasury bills—rather than investing insurance premiums mostly in bonds. Buffett would rather hold cash and not take the interest-rate risk of bonds.
According to conventional wisdom, an annual ROI of approximately 7% or greater is considered a good ROI for an investment in stocks. This is also about the average annual return of the S&P 500, accounting for inflation. Because this is an average, some years your return may be higher; some years they may be lower.
According to many financial investors, 7% is an excellent return rate for most, while 5% is enough to be considered a 'good' return. Still, an investor may make more or less than the average percentage since everything depends on the investment's circ*mstances.
(However, one could achieve a 150/0 through the use of leverage, with a margin account. But, know that any investment return must be netted against the cost of leverage, i.e. the interest rate charged for the funds borrowed.) In short, achieving a sustained 30% stock market return is highly unlikely to happen.
The 50/30/20 rule is a budgeting technique that involves dividing your money into three primary categories based on your after-tax income (i.e., your take-home pay): 50% to needs, 30% to wants and 20% to savings and debt payments.
Despite the ability to access retirement accounts, many experts recommend that retirees keep enough cash on hand to cover between six and twelve months of daily living expenses. Some even suggest keeping up to three years' worth of living expenses in cash. Your emergency fund must be easy for you to access at any time.
A long-standing rule of thumb for emergency funds is to set aside three to six months' worth of expenses. So, if your monthly expenses are $3,000, you'd need an emergency fund of $9,000 to $18,000 following this rule. But it's important to keep in mind that everyone's needs are different.
The relationship can be referred to as the “Rule of 21,” which says that the sum of the P/E ratio and CPI inflation should equal 21. It's not a perfect relationship, but holds true generally.
One of the popular ones is the 30:30:30:10 rule, where it suggests investing 30% of savings in stocks, 30% in bonds, 30% in real estate, and the remaining 10% in cash or cash equivalents. However, it's essential to understand that this rule is generic and may not be perfect for everyone.
To make money in stocks, you must protect the money you have. Live to invest another day by following this simple rule: Always sell a stock it if falls 7%-8% below what you paid for it. No questions asked. This basic principle helps you cap your potential downside.
In theory, young people investing for retirement should absolutely have 100% of their portfolio invested in equities. The biggest risk in the stock market is a crash which brings lower prices. Your best-case scenario as a young saver/investor is that you get to put more savings to work at lower prices.
A good range for how many stocks to own is 15 to 20. You can keep adding to your holdings and also invest in other types of assets such as bonds, REITs, and ETFs. The key is to conduct the necessary research on each investment to make sure you know what you are buying and why.
Warren Buffett recently called Apple "the best business Berkshire owns," so buying more would indicate Buffett wants more of a good thing. The stock isn't cheap at a forward price-to-earnings ratio (P/E) of 29, well above its decade average of 19.
Berkshire has a history of outperforming the S&P 500 during recessions, and performing especially well during bear markets, according to data from Bespoke Investment Group. Since 1980, Berkshire shares have beat the broader market over the course of six recessions by a median of 4.41 percentage points.
The 90/10 Principle was popularized by Stephen Covey, the amazing author of The 7 Habits of Highly Effective People. It states that: 10% of life is made up of what happens to you, and 90% of life is decided by how you react. We truly have no control over 10% of what happens to us.
The 90/10 rule requires that an institution “will derive not less than ten percent of such institution's revenues from sources other than provided under this title [title IV]” (Pub. L. 89–329, title IV, §487).
A typical 90/10 principle is applied when an investor leverages short-term treasury bills to build a fixed income component portfolio using 10% of their earnings. The investor then channels the remaining 90% into higher risk but relatively affordable index funds.
What Buffett's rule essentially means is don't become enchanted with an investment's potential gains, but also look for its downsides. If you don't get enough upside for the risks you're taking, the investment may not be worth it. Focus on the downside first, counsels Buffett.
Our reaction to a situation literally has the power to change the situation itself. Let's use an example, you are having breakfast with your family, your sister knocks over a cup of tea onto your shirt, you have no control over what just happened but what will happen next will be determined by how you react.
For example, the 90/10 ratio takes the ratio of the top 10% of incomes (Decile 10) to the lowest 10% of incomes (Decile 1). A 90/10 ratio of five means that the richest 10% of the population earn five times more than the poorest 10%.
The 10/90 rule says that the first 10 percent of time you spend planning and organizing you work can turn into as much as 90 percent of the time that you save in execution. The power of having a plan is that you no longer have to question what you're going to do.
This is why I have come up with the 90/10 rule – When working with data, 90% of your time should be spent on a structured strategic approach, while 10% of your time should be spent “exploring” the data. The 90% structured time should be used putting the steps outlined in the SMART Data framework into operation.
I read about the Rule of 90/10 in Robert Kiyosaki's book, "Rich Dad, Poor Dad." Simply put, it says that in any profession 90% of the money is controlled by 10% of the people. Is this important? It certainly is! It can help you determine where to focus your time and energy to maximize your success.
The short version is that it recommends making a 20% down payment on the car, taking four years to return the money to the lender, and keeping transportation costs just under 10% of your monthly income.
The 90/10 investing strategy for retirement savings involves allocating 90% of one's investment capital in low-cost S&P 500 index funds and the remaining 10% in short-term government bonds. The 90/10 investing rule is a suggested benchmark that investors can easily modify to reflect their tolerance to investment risk.
One of the most popular risk management techniques is the 1% risk rule. This rule means that you must never risk more than 1% of your account value on a single trade. You can use all your capital or more (via MTF) on a trade but you must take steps to prevent losses of more than 1% in one trade.
Warren Buffett's Four Pillars of Investing. Quality of Information. Consistency of Earnings Growth. Finding Opportunities To Drive Your Investment Style.
Introduction: My name is Arielle Torp, I am a comfortable, kind, zealous, lovely, jolly, colorful, adventurous person who loves writing and wants to share my knowledge and understanding with you.
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