Warren Buffett’s 90/10 Rule: Why Most Retirees Are Doing It Wrong

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When Warren Buffett disclosed his instructions for managing his wife’s inheritance after his death, it became quite publicized. Buffett recommended something strikingly simple: put 90% of the money in a low-cost S&P 500 index fund and the remaining 10% in short-term government bonds.

This is a rather straightforward approach, and it has been dubbed the 90/10 rule. Investors see it as a perfect way to simplify their portfolios and capture market returns without all the fuss that comes with actively keeping up with the market.

But simplicity isn’t something you should always chase.

Here’s what’s “wrong” with Buffett’s 90/10 rule

The problem is not with Buffett’s advice itself, which was specifically tailored for his wife’s unique circumstances, but with how retirees have misinterpreted and misapplied this strategy to their own situations.

Unlike Mrs. Buffett, you cannot afford to wait a decade for markets to rebound because you need that money to pay bills, buy groceries, and cover medical expenses. This timing risk, known as sequence of returns risk, is one of the most dangerous threats to retirement portfolios, and the 90/10 allocation amplifies it dramatically.

And you should also keep in mind that this 90/10 rule is from Buffett’s 2013 letter to Berkshire (NYSE:BRK-A, NYSE:BRK-B) shareholders. The stock market has changed drastically since then. I would only take Buffett’s prescription if you are looking at a very long-term horizon and you can stay unfazed no matter what happens to the market during that period.

If you are a conservative investor who doesn’t have millions in the bank, I wouldn’t follow this blueprint 1:1 and craft my own instead.

Which philosophy should you follow?

The closest thing to 90/10 you may find is from Warren Buffett’s “guru,” Benjamin Graham. Per Graham, you should have anywhere from 25% to 75% of your money in either stocks or in Treasuries/high-grade bonds.

With hindsight, you’d ideally want to put 75% into ETFs like the Invesco QQQ Trust (NASDAQ:QQQ), the SPDR S&P 500 ETF Trust (NYSEARCA:SPY), and into blue-chip stocks, with some exposure to growth stocks like Nvidia (NASDAQ:NVDA) during selloffs like the one in 2022. Very few investors have the guts to do that, but those who have done so are laughing their way to the bank.

Conversely, the current environment calls for a different approach. Many stocks are trading at nosebleed valuations, so it would be a smarter idea to start tilting more towards bonds. Interest rates are coming down as well, so it only makes sense to lock in the higher rate.

You can take Buffett’s own moves as an excellent yardstick for where he thinks the market is today. He has been hoarding cash and is only increasing that pile, being a net seller for 12 consecutive years. If he really believed 90/10 was the best strategy, his portfolio allocations would resemble that. Yet, this is not the case.

You need your own investing rule

Are you just a few years away from retiring, with $1 million tucked away in a diverse group of assets to fund your retirement? If so, I’d stay away from the 90/10 rule with a 10-foot pole. It would be much smarter to put half or more of your portfolio into bonds, and most of the rest into dependable dividend stocks and dividend ETFs.

Or, are you just starting out? Again, in this case, it may make sense to consider investing in more than just the S&P 500. The technology sector has been spearheading the stock market since the late 1990s. It’s undeniable now that even GDP growth is being largely driven by AI. Having some exposure to the QQQ makes sense at this stage. In fact, if you are a strong believer in AI, it’s better to spread out your wings and invest in semiconductor ETFs and AI ETFs.

All things considered, there’s no blanket investment “rule” that will cover everyone. It may sound corny, but it truly depends on how much risk you are willing to take and where you are in your life.