Warren Buffett has said that 90 percent of the money he leaves to his wife should be invested in stocks, with just 10 percent in cash. Does that work for non-billionaires?
As far as asset allocation advice goes, 90 percent in stocks sounds pretty aggressive. But IESE professor Javier Estrada thinks that the strategy has something going for it — even for retirees.
In his article for the Journal of Retirement, titled "Global Asset Allocation in Retirement: Buffett's Advice and a Simple Twist," Estrada argues that a 90/10 (stock/bond) allocation has a low failure rate, good downside protection, and high upside potential — a winning combination.
And the twist? Estrada suggests retirees keep an eye on stock market performance over the previous year when they choose whether to take their annual withdrawal from the stocks or from the bonds in their portfolio. The twist aims to avoid selling stocks when they are down, while trying to roughly stick to the 90/10 balance over time.
Asset allocation for the long haul
Asset allocation is one of the most important investment decisions for retirement. Some financial advisers suggest that retirees progressively move out of stocks and into bonds, for safety's sake, as they get older.
But Estrada and others argue that such a policy is not necessarily the best. In past articles, Estrada has made a case for investing more heavily in stocks. If a large nest egg is the goal, stocks are not necessarily riskier than bonds, just more volatile, he emphasizes. In fact, when Estrada crunches the numbers, he finds that long-term investments in stocks tend to fund wealthier retirements than bonds do.
See: "Retire at Your Own Risk," "Stocks vs Bonds: Where the Risk Lies" and "A Comforting Read in Times of Stock Market Volatility."
Estrada's idea for this article comes from Warren Buffett's 2013 letter to Berkshire Hathaway shareholders in which the Oracle of Omaha explained that, in his own will, he was instructing the trustee in charge of his wife's inheritance to put 10 percent in cash and 90 percent in the U.S. stock market.
Estrada notes that 100 percent in stocks has a historical tendency to outperform the 90-10 allocation recommended by Buffett over the course of a 30-year retirement, at least when it comes to some important variables largely related to upside potential. And yet, he also notes that 90-10 offers better downside protection than the 100-0 strategy. In sum, "Buffett's suggested allocation seems to provide a middle ground between the best performing strategy (100/0) in terms of upside potential and the best performing strategies (60/40 and 70/30) in terms of downside protection," Estrada writes.
And that leads to his twist. By looking at the stock market performance over the previous year, Estrada suggests that retirees take their annual withdrawal from bonds when stocks have performed badly in either absolute or relative terms. The simple idea is to give stocks time to recover. With the dynamic twist, Estrada reports a strategy with both higher upside potential and a slightly better downside protection than those for the 90/10 stock/bond portfolio.
Backing up Estrada's advice is an analysis of stock market data from 1900 to 2014 for 21 countries. He breaks this down into 86 rolling 30-year retirement periods, each starting with a portfolio worth $1,000. He assumes a 30-year retirement period, a 4 percent initial withdrawal ($40), subsequently annually adjusted by inflation, and annual rebalancing.
On average, investors following the simpler twist proposed end up with a higher inheritance, more upside potential, and better downside protection than they would if they followed either a 90/10 or a 60/40 split. Thus, any investor aggressive enough to find a 90/10 allocation acceptable would be better off by implementing this strategy, with a little twist.
FAQs
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 toward low-cost stock-based index funds and the remainder 10% to short-term government bonds.
What is the Warren Buffett 70/30 rule? ›
The 70/30 rule is a guideline for managing money that says you should invest 70% of your money and save 30%. This rule is also known as the Warren Buffett Rule of Budgeting, and it's a good way to keep your finances in order.
What did Warren Buffett tell his wife to invest in? ›
Buffett said he revises his will every three years, and he still advises his wife to allocate 10% of her inheritance to short-term government bonds and 90% to a low-cost S&P 500 index fund.
What is the 110 minus age rule? ›
A common asset allocation rule of thumb is the rule of 110. It is a simple way to figure out what percentage of your portfolio should be kept in stocks. To determine this number, you simply take 110 minus your age. So, if you are 40, then the rule states that 70% of your portfolio should be kept in stocks.
What is Warren Buffett's golden rule? ›
1 – Never lose money. Let's kick it off with some timeless advice from legendary investor Warren Buffett, who said “Rule No. 1 is never lose money. Rule No. 2 is never forget Rule No.
What are Warren Buffett's 5 rules? ›
A: Five rules drawn from Warren Buffett's wisdom for potentially building wealth include investing for the long term, staying informed, maintaining a competitive advantage, focusing on quality, and managing risk.
What is the rule #1 of Buffett? ›
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.”
What is the Buffett's two list rule? ›
Buffett's Two Lists is a productivity, prioritisation and focusing approach where you write down your top 25 goals; circle your 5 highest priorities; then focus on those 5 while 'avoiding at all costs' doing anything on the remaining 20.
What are Warren Buffett's 10 rules for success? ›
Warren Buffett's ten rules for success and how we can apply them to our lives
- Reinvest Your Profits. ...
- Be Willing to Be Different. ...
- Never Suck Your Thumb. ...
- Spell Out the Deal Before You Start. ...
- Watch Small Expenses. ...
- Limit What You Borrow. ...
- Be Persistent. ...
- Know When to Quit.
There are no set ages to get into or to get out of the stock market. While older clients may want to reduce their investing risk as they age, this doesn't necessarily mean they should be totally out of the stock market.
Buffett's three children, Howard, Susan, and Peter, will be in the mix after Buffett's death since they will oversee a charitable trust that will hold Buffett's now 15% economic stake in Berkshire, which has voting power of over 30% because it consists almost entirely of supervoting A shares.
Who will inherit Warren Buffett's money? ›
Famously frugal Warren Buffett has always been clear his billions won't go to family—it'll be invested in charitable foundations, a fitting end to a career of philanthropy.
At what age should you have 100k? ›
“By the time you hit 33 years old, you should have $100,000 saved somewhere,” he said, urging viewers that they can accomplish this goal. “Save 20 percent of your paycheck and let the market grow at 5% to 7% per year,” O'Leary said in the video.
What is the 4th retirement rule? ›
What does the 4% rule do? It's intended to make sure you have a safe retirement withdrawal rate and don't outlive your savings in your final years. By pulling out only 4% of your total funds and allowing the rest of your investments to continue to grow, you can budget a safe withdrawal rate for 30 years or more.
What is the rule of 70 age? ›
Rule of 70: the employee's age plus years of continuous, full-time service equal 70 or more, and the employee is at least age 55, with at least ten years of continuous, full-time service.
What is an example of a 90 10 portfolio? ›
To calculate the performance of a 90/10 portfolio, you would multiply each portion by its return for the year. For example, if the S&P 500 returned 10% for the year and Treasury bills paid 4%, the calculation would be 0.90 x 10% + 0.10 x 4%, resulting in a 9.4% return overall.
What is the 90 10 rule for wealth? ›
The easiest way to do it is with the 90/10 rule. It goes like this: 90% of your contributions go to safe, boring investments like low-cost total stock market index funds. The remaining 10% is yours to play with.
What is the 90 10 rule of retirement? ›
The 90/10 Rule of Retirement: Defined
“In preparation for retirement, most people spend 90% of their planning time on the financial issues and 10% on the non-financial issues.
