Getting to know Warren Buffet's 90/10 strategy
What is the 90/10 strategy?
The 90/10 strategy is Warren Buffet's investment strategy to put 10% in lower-risk investments like short-term government bonds and the remaining 90% in stock-based index funds like low-cost S&P 500 index funds. Buffet believes that this policy can generate long-term results in an investor's portfolio more than those who resorted to a pension fund, institution, or investment managers who charge high fees.
The 90/10 strategy explained.
Let's focus on what to do with the 90% by defining an index fund. Index funds are exchange-traded funds that follow index performances. The Standard and Poor's 500 (S&P 500) is an example of an index with 500 of the US's enormous publicly traded companies. If the S & P 500 rises, the index fund also does. As Buffet suggested, an investor should put 90% of retirement funds in a stock-based index fund.
On the other hand, the remaining 10%'s allocation is to government bonds. Government bonds are financing instruments to generate more capital. Explaining further, we can say that the investor is the creditor. The investors lend money to the government, then, later on, the government will pack back on the maturity date. A government bond is usually low-risk due to a guaranteed payback and the government's creditworthiness. It also offers low-interest rates, unlike other investments. An investor can rest assured that safety and income consistency is there. If there is a downturn in the financial market or the economy, government bonds will not be affected, unlike stock funds. Other investors consider government bonds safe-haven investments.
Warren buffet's additional tips
Warren Buffet suggests that investors should avoid investment managers who charge high fees because they accumulate quickly. For example, a young person applies for a retirement account with a high-fee investment manager that he will pay every year. If he invested in lower-cost funds instead of paying the investment manager's fee, he would retire with more money.
The financial communities think otherwise from Warren Buffet's investment strategy. They say that a retirement portfolio should be a mix of two or more funds like stock, bonds, or international funds to avoid market downturns. This stock-based funds strategy might be too risky later on where a single recession can endanger an investor's retirement savings.
Financial advisors can say that the typical rule of thumb investing strategy where you invest bond percentage according to your age is conservative. For example, if you are 80 years old, then invest 80% in bonds. Some say this is way too conservative, but Warren Buffet's strategy is also way too risky.
To sum it up
One should always be aware of his fees. You
should see if you're paying too much for an investment manager or a financial
advisor. One should know how to evaluate if the investment manager hired is
enough or if a better one is needed. A low fee is not always equal to low
performance and vice versa. Higher prices don't always mean higher returns. No
one may never have control over the market, but you can forever control what
you pay and choose people tailored for you and your needs.
