What Is a 90/10 Portfolio Strategy and How Does It Work?

Warren Buffett's investing success has made him a role model for investors globally. As chairman and CEO of Berkshire Hathaway, he has amassed significant wealth from strategies focused on long-term growth, intrinsic value, and a comprehensive understanding of business. 

Although Buffett’s approach is meticulous, some of his advice is surprisingly simple. In a 2013 letter to Berkshire Hathaway shareholders, Buffett outlined what will happen to his fortune after he dies. In the letter, he says, “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.”

Today, it’s called the Warren Buffet 90/10 strategy or simply the 90/10 portfolio. It’s a testament to the idea that simplicity often outshines the most intricate strategies.

Unpacking Warren Buffett’s 90/10 portfolio

The Warren Buffett 90/10 portfolio is designed for prudent balance—to capitalize on long-term market growth while hedging against market volatility. This low-cost strategy is helpful for experienced and sophisticated investors outside large financial institutions. 

How does the 90/10 portfolio work? 

Warren Buffet’s 2013 letter explains the 90/10 rule—put 90% of assets in S&P 500 index funds and the other 10% in short-term government bonds. 

Let’s dive deeper into each area. 

90% in a low-cost S&P 500 Index Fund 

Building an actual Warren Buffett portfolio begins by investing most of your assets in a low-cost index fund that tracks the S&P 500. 

Index funds are passive investments that aim to replicate the performance of the index they track. Index funds can be organized as common securities, such as an exchange-traded fund (ETF) or a mutual fund. 

Index funds are the easiest, most reliable way to attain wealth for most investors. They offer the following:

Greater diversification

An index fund gives exposure to various companies, spreading risk across sectors.  

More predictable performance

Many actively managed funds fail to outperform the broad market over the long term, making index funds an attractive option for consistent returns.

Lower fees

Index funds generally have lower fees than actively managed funds, which charge more to cover their trading and research costs. Following Buffett’s advice, investors can choose a low-cost fund to minimize fees that eat into their returns. 

Warren Buffett’s index fund approach specifically advises choosing a fund that follows the S&P 500, the world’s most liquid index. S&P 500 index funds offer broad exposure to large-cap U.S. stocks and capture the overall performance of the leading 500 U.S. companies. There are many to choose from, although Buffett’s 2013 letter referred to Vanguard as an example of a low-cost S&P 500 index fund. 

Even professional fund managers struggle to beat the S&P 500 benchmark over the long term.  

10% in short-term government bonds

The Warren Buffett 90/10 approach recommends investing the remaining 10% in short-term U.S. government bonds. U.S. government bonds include debt securities such as Treasury Bills (“T-Bills”), Treasury Notes (“T-Notes”), and Treasury Bonds (“T-Bonds”). The Warren Buffet portfolio specifies “short-term” bonds, meaning T-Bills, as those securities mature in one year or less. 

This offers several benefits: 

Safety

Bonds backed by the U.S. government are among the safest investments available. These bonds are considered low-risk and provide stability to the portfolio, especially when the stock market is volatile or declining.

Income 

Bonds pay interest, providing a modest but steady income. They're particularly handy for retirees managing their retirement accounts.  

Liquidity

Bonds can be quickly sold to provide cash during downturns or emergencies.

Pros of the 90/10 portfolio 

When Warren Buffett adopts a long-term allocation for his own portfolio, you know it has some real upsides. They include: 

Balanced growth

The portion invested in an S&P 500 index fund will follow the stock market’s growth trajectory, tapping into the growth of established companies and rising stars. 

Risk mitigation

The part allocated to short-term government bonds is a hedge against market downturns or heightened volatility. It helps stabilize the portfolio by ensuring not all assets move in tandem with stock market fluctuations.

Income generation

The bonds provide steady cash flow by paying periodic interest. It’s attractive for retirees or those seeking a consistent income stream from their investments.

Cons of the 90/10 portfolio

Of course, the 90/10 portfolio also has potential downsides. 

Maintaining the 90/10 ratio 

Market movements may cause the portfolio to drift from the 90/10 ratio, and rebalancing the portfolio can get complicated. However, Composer's no-code platform makes this process easy and seamless.

Choosing the right products

Choosing the right government bonds means considering bond yields, maturity rates, and the interest rate environment. 

Limited potential returns

Holding 10% in bonds means you may miss some market opportunities. When the stock market is booming, you’ll see lower overall returns than a 100% stock allocation.

Market timing

A 90/10 portfolio is meant to buy and hold for the long term. Some investors may be tempted to shift allocations based on short-term market predictions. It’s challenging, as timing the market is notoriously tricky. 

Creating a 90/10 portfolio with Composer 

Composer offers you the tools to take complete control of your investment journey, including building a 90/10 portfolio by copying the Warren Buffett strategy.

With Composer, you don’t need coding skills to build effective algorithmic trading systems, dynamic strategies we call symphonies. You can select a symphony from our wide array of pre-programmed approaches or use our AI platform to build your own.

Composer’s ChatGPT-4-powered AI system allows you to describe your goals in simple, natural language. The platform will immediately build your perfect symphony. 

Composer builds its strategies from a deep repository of historical market data, using sophisticated analysis to assess price movements, risk, volatility, value, exposure, and other factors. 

Starting your journey to a 90/10 portfolio is easy. These three simple steps will have you there in just a few clicks and keystrokes. 

1. Sign up for Composer for free 

Start by taking advantage of Composer’s 14-day free trial. Go to Composer’s sign-up page and create an account in under 90 seconds; just answer a few simple questions and fund your account using a bank account.

Once funded, you can invest in a pre-made symphony or create your own. 

2. Create a new symphony

After creating your Composer account, navigate to the "Create" button in the top-left corner of the platform's interface. Here, you can access the symphony creation feature, your gateway to crafting an innovative investment strategy.

3. Click on "Create with AI" or use the no-code editor

Warren Buffett’s strategy is pre-built for you on Composer’s Discover page. Look for the symphony called Copy Warren Buffett. 

Alternatively, if you prefer a hands-on approach or have specific requirements, you can opt for the no-code editor. This tool empowers you to craft your investment strategy according to your vision and needs. You can incorporate various technical indicators, trading rules, and investment parameters.

Create, customize, capitalize 

Join Composer today to supercharge your investment portfolio. Explore the countless possibilities of our AI-powered platform and thriving community database of more than 1,000 stock trading algorithms. It’s like having a personalized stock advisor. You’ll be investing like Warren Buffett in no time.