Warren Buffett’s 90/10 Portfolio

Warren Buffett – The 90/10 Portfolio 

The 90/10 Portfolio is a portfolio that is designed by the expert investor Warren Buffett. It is designed to keep a low-cost, basket of businesses that are bound to do well. The allocation is as follows:

  • 90% low-cost S&P 500 tracker (here Buffett specifically suggests Vanguard as a low-cost fund option)
  • 10% short-term government bonds

He also thinks that this strategy is appropriate for those who don’t invest for a living, and the approach avoids high fees and expenses. He believes this portfolio will be “superior to those attained by most investors – whether pension funds, institutions or individuals.” His primary purpose for this portfolio is that most investors will get better returns through low-cost and low-turnover index funds.

The potential negative of the 90/10 portfolio is that is exclusively invested in the U.S market. Many believe that diversifying internationally reduces risk. The significant swings in stock performance may also be a potential drawback to this portfolio since 90% of the portfolio depends on it. Also, with just two asset classes, some opportunities for diversification are missed.

Putting 90/10 to the Test

Using the CRM2Plus software, we can test to see if the 90/10 Portfolio has historically performed well. We can create the same allocations of the 90/10 portfolio using the benchmarking option on the software, to create a hypothetical portfolio:

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In the CRM2Plus software, you can benchmark your actual portfolio alongside various index funds. We have over 40 different index funds and counting, including the S&P 500. As an investor, you can view how various indexes do compared to your actual portfolio.

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We use the software to perform an analysis of what $100,000 would be worth now if we invested in a replicate of the 90/10 portfolio 15 years ago, in 2003 (When Buffett first talked about this portfolio strategy). We can generate a graphical representation of the fair market value (FMV) to see the performance historically across different business cycles:

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It is also easy to generate a summary of the account through CRM2Plus which can be used by advisors to show clients a breakdown of key investment return statistics as well as contributions, withdrawals, and transfers. Below is a snapshot of the account summary generated through the software:

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The Bottom Line

CRM2Plus provides an effective solution to monitor your portfolio and makes comparing portfolios an effortless task. We can see from the graphs that the 90/10 Portfolio indeed generates a stable return (6.04% over 15 years). A hypothetical portfolio set for 90/10 would have performed historically and found the results were positive.

The 90/10 Portfolio has faulted under certain economic conditions, such as recessionary pressures and volatility. Using the CRM2Plus software, we can visually see the 90/10 Portfolio dips during the financial crisis of 2008 but has been on a steady increase since then.

Recent research suggests that retirees might be able to lean heavily on stocks without putting their nest egg in grave danger. But if a 90% stock allocation gives you the jitters, pulling back a little might not be such a bad idea.

 

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