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It’s simple, effective, and anyone can use it.
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Warren Buffett is undoubtedly one of the greatest investors of all time. Fortunately, he’s not shy about sharing his wisdom, including how he picks stocks and an investing strategy he recommends.
In his 2013 letter to Berkshire Hathaway shareholders, Buffett shared investing advice he’ll give for the money he leaves to his wife in his will. Although it’s advice for what will be his wife’s portfolio, it’s a winning strategy for anyone. Buffett even says that he believes that the “long-term results from this policy will be superior to those attained by most investors.”
Warren Buffett’s 90:10 investing strategy
Buffett’s recommendation is an investment portfolio with a 90:10 ratio of stocks to bonds. Specifically, he advises putting:
90% in an S&P 500 index fund, with Buffett suggesting one from Vanguard10% in short-term government bonds
Why these two investments? Most of your funds will be in an S&P 500 index fund, which is there to grow your money as efficiently as possible. The S&P 500 is an index of 500 of the largest companies on U.S. stock exchanges, and its average return is about 10% per year over the last 50 years.
Now, there are lots of ways to invest in stocks. The reason this option works so well is because it gives you a diversified portfolio in one investment. It’s easy, it takes hardly any time, and it provides strong returns when the stock market is doing well. Also, index funds tend to have very low fees.
Short-term government bonds are there to add some stability. These provide fixed income in the form of interest payments on the bonds. You also don’t need to worry about losing money on them.
Pros and cons
Buffett’s strategy offers maximum growth potential for a minimal time commitment. Although stocks are more volatile, they can also earn much larger returns than bonds. By having 90% of your funds in stocks, your portfolio will have more long-term growth. And since you’re just putting your money in an index fund every month, there’s no research required on your part. You could even automate your investments.
The biggest downside is volatility. Stock-heavy portfolios can decrease in value quite a bit during bear markets. A portfolio with a larger bond allocation, such as 70:30 or 60:40 stocks to bonds, will be more stable.
This strategy is also very hands off. That’s a benefit if you just want to take the “set it and forget it” approach with your investments. On the other hand, it’s a drawback if you want to take an active role and pick your own stocks.
Should you try it?
The investment portfolio Buffett recommended will work for long-term investors. Even though the stock market goes through highs and lows, when you look at it over the decades, it has consistently gone up.
If you’re looking for an easy way to invest for retirement, Buffett’s portfolio advice is worth considering. It’s an especially good approach for younger investors. If you have 20 years or more until retirement, your portfolio will have plenty of time to recover from any downturns, which takes the risk out of investing heavily in stocks.
Those who are nearing retirement may want to have more money in bonds for greater stability. However, this also depends on your risk tolerance and how much you have saved.
One last thing to remember is that there are many effective investing options out there. Some people like to add other types of assets to their portfolios, such as real estate. Some like stock picking — which, to be fair, is how Buffett made his billions. It all depends on what best fits your goals and your investing style.
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The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Lyle Daly has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.
