What it means
In his 2013 shareholder letter, Buffett wrote that his instructions to the trustee were to put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund (a fund that simply holds the 500 largest US listed companies). His reasoning was that most investors, professional or not, struggle to beat the index after fees.
The stock slice is the growth engine. Over long periods broad stock markets have historically rewarded patient owners, although with sharp falls along the way, and a long horizon lets an ordinary saver sit through those falls.
The bond slice is not there to grow. It exists to be spent during a crash, so the saver never has to sell stocks at the bottom to pay bills.
Costs are the quiet hero of the design. A fund charging a few hundredths of a percent a year leaves nearly all of the market's return with the saver, while a fund charging 1% a year takes a large bite out of compounding over decades.
The hard part is behavioural. Holding 90% in stocks feels reckless during a 30% fall, and the plan suits people who can do nothing precisely when doing nothing is hardest.
Critics note that it ignores personal circumstances, so someone near retirement, with unstable income or living outside the US may need a different mix. For managers, the transferable idea is extreme simplicity: put most resources into the highest-expected-return engine and keep a small, boring reserve for survival.
Check the split about once a year and rebalance if it drifts, so that a stock rally does not quietly turn 90/10 into 95/5.
In practice
Real-world examples.
Example
A salaried engineer invests her monthly surplus 90% into a broad index fund and 10% into short-term government bills. Through three downturns over twenty years she never sells stocks, and the bond slice covers two gaps between jobs.
Example
A trustee managing a family inheritance adopts the split literally. Annual rebalancing back to 90/10 forces automatic selling high and buying low without any forecasting.
Example
A freelance designer copies the 90% in stocks but skips the bond reserve. A slow quarter during a market crash forces stock sales at a loss, the exact failure the 10% was designed to prevent.
Formula
Calculation
Target allocation = 90% in a low-cost stock index fund + 10% in short-term government bonds, rebalanced periodically back to target.
Worked example: a saver holds $200,000.
Stocks: $200,000 x 90% = $180,000. Bonds: $200,000 x 10% = $20,000.
After a year, stocks rise 20% and bonds are unchanged. Stocks: $180,000 x 1.20 = $216,000. Bonds: $20,000. Total: $216,000 + $20,000 = $236,000.
Stocks are now about 91.5% of the portfolio ($216,000 / $236,000), so the split has drifted.
Target stocks: $236,000 x 90% = $212,400. Target bonds: $236,000 x 10% = $23,600.
Rebalance by selling $216,000 - $212,400 = $3,600 of stocks and buying the same amount of bonds: $20,000 + $3,600 = $23,600.Case study
Seen in the real world.
This case study is fictional and illustrative. Mei, an invented finance manager, sets up her parents' $300,000 retirement account on a 90/10 split, with $270,000 in a low-cost index fund and $30,000 in short-term government bonds. Her parents withdraw $2,500 a month, so the bond slice covers $30,000 / $2,500 = 12 months of spending.
She writes the rules on one page: name the fund, name the split, rebalance each January, and never sell stocks during a downturn while the bond slice has money in it. When a market fall arrives, her parents draw on the bonds for a year while the index fund recovers, and nobody has to make a frightening decision. Her page also states the conditions for changing the plan, such as a health event or a sustained rise in spending, so that any adjustment is deliberate rather than panicked. Her parents keep a copy on the fridge, and the rebalancing date is in the family calendar.
Watch out
Common mistakes.
- Copying the 90% and ignoring the 10%. The reserve is what makes the aggressive part survivable in a life with real emergencies.
- Paying active-fund fees while following an index philosophy. High costs quietly break the arithmetic the strategy depends on.
- Treating the split as sacred. Age, income stability and home-country markets can all justify a different ratio.
Questions
People also ask.
Did Buffett invent the 90/10 strategy for everyone?
No, he described it as the plan for his wife's trust and as sensible for most savers, not as a law. His point was that simplicity and low cost beat most sophistication.
How often should it be rebalanced?
Once a year is common and usually enough, because more frequent trading adds costs and temptation without improving the design.
Does it work outside the United States?
The principle travels, but the index should match the investor's home or global market and the bonds should reflect safe local assets.
From the founder's library
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