
There's a strange idea floating around among investors that Warren Buffett thinks you should have a 90/10 asset allocation. This is not true for several reasons.
First, Warren Buffett, like Jim Dahle, is not dumb enough to tell you what your asset allocation ought to be. (I tell people to pick something reasonable and stick with it.) In fact, you shouldn't take anyone's advice about asset allocation until they've spent a couple of hours chatting with you about your personal finances, hopes, dreams, goals, and past financial behavior. Experienced financial planners know this, but apparently too many of the rest of us do not.
Second, this is not Warren Buffett's portfolio. Warren Buffet's wealth, like that of many entrepreneurs including yours truly, is mostly tied up in his small business. He's worth something like $150 billion and almost all of that consists of Berkshire Hathaway stock. He owns almost 32% of the company. If you want, we can dive into the details of what Berkshire Hathaway owns. Berkshire is an insurance company, and it has substantial reserves. As I write this article near the end of 2024, those reserves are invested in mostly US large cap stocks ($313 billion) and cash ($277 billion). Top holdings among the stocks include Apple, American Express, Bank of America, and Chevron, although it recently sold a bunch of Apple stock (615 million shares or so). If Warren Buffett has an asset allocation, it would be 53/47, with most of that 53% in US large cap stocks.
The 2013 Annual Letter
Where does this 90/10 idea come from? It comes from Buffett's Berkshire Hathaway Annual Letter to Investors from 2013. Unlike most articles on this topic, I'm going to quote the ENTIRE relevant section. The bolding is mine.
“Most investors, of course, have not made the study of business prospects a priority in their lives. If wise, they will conclude that they do not know enough about specific businesses to predict their future earning power.
I have good news for these non-professionals: the typical investor doesn’t need this skill. In aggregate, American business has done wonderfully over time and will continue to do so (though, most assuredly, in unpredictable fits and starts). In the 20th century, the Dow Jones Industrials index advanced from 66 to 11,497, paying a rising stream of dividends to boot. The 21st century will witness further gains, almost certain to be substantial. The goal of the non-professional should not be to pick winners—neither he nor his “helpers” can do that—but should rather be to own a cross-section of businesses that in aggregate are bound to do well. A low-cost S&P 500 index fund will achieve this goal.
That’s the ‘what' of investing for the non-professional. The ‘when' is also important. The main danger is that the timid or beginning investor will enter the market at a time of extreme exuberance and then become disillusioned when paper losses occur. (Remember the late Barton Biggs’ observation: ‘A bull market is like sex. It feels best just before it ends'). The antidote to that kind of mistiming is for an investor to accumulate shares over a long period and never to sell when the news is bad and stocks are well off their highs. Following those rules, the ‘know-nothing' investor who both diversifies and keeps his costs minimal is virtually certain to get satisfactory results. Indeed, the unsophisticated investor who is realistic about his shortcomings is likely to obtain better longterm results than the knowledgeable professional who is blind to even a single weakness.
If ‘investors' frenetically bought and sold farmland to each other, neither the yields nor prices of their crops would be increased. The only consequence of such behavior would be decreases in the overall earnings realized by the farm-owning population because of the substantial costs it would incur as it sought advice and switched properties.
Nevertheless, both individuals and institutions will constantly be urged to be active by those who profit from giving advice or effecting transactions. The resulting frictional costs can be huge and, for investors in aggregate, devoid of benefit. So ignore the chatter, keep your costs minimal, and invest in stocks as you would in a farm.
My money, I should add, is where my mouth is: what I advise here is essentially identical to certain instructions I’ve laid out in my will. One bequest provides that cash will be delivered to a trustee for my wife’s benefit. (I have to use cash for individual bequests, because all of my Berkshire shares will be fully distributed to certain philanthropic organizations over the 10 years following the closing of my estate.) 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. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors—whether pension funds, institutions or individuals—who employ high-fee managers.”
I don't see how anyone can come away from reading that selection with anything other than the idea that Warren Buffett thinks most stock investors should be buying and holding shares of low-cost, broadly diversified index funds during their careers. That's it. That's the point of this selection. When he says, “What I advise here,” he is talking about what he said BEFORE that sentence (use index funds), NOT what he said AFTER that sentence (about specific instructions to the trustee of his wife's trust).
More information here:
Do What Buffett Says, Not What He Does
Let’s Celebrate Taylor Larimore’s 100th Birthday by Asking Him 4 Questions About Money
The 90/10 Portfolio
So, 90/10, with 90% in the Vanguard 500 Index Fund and 10% in short-term government bonds, is his recommendation for his wife's trust. By the way, his wife is in her late 70s, and Warren will presumably be leaving her many millions of dollars. Certainly enough that the 10% in cash is more than most people retire with in total.
90/10 is NOT a recommendation for Warren's kids, you, or anybody else. It is a very specific recommendation to a very specific trustee who will likely only be managing that money for something like 12 years. It is also likely that it is enough money that it really doesn't matter what asset allocation is used. If it's 100% stocks, fine. If it's 100% cash, also fine. Anything in between is also going to be fine for those 12 years.
Is 90/10 Reasonable?
A 90/10 portfolio is reasonable for plenty of people. These include young people who still have much of their earnings ahead of them. These include very wealthy retirees who spend only a tiny percentage (1%-2%?) of their portfolio every year. These include many investors with a substantial need, desire, and ability to take risk.
Is the S&P 500 a reasonable choice as an only stock holding? Yes, I think it's reasonable, but I don't think it's ideal at all. I bet if you pinned Warren down on it, he'd agree with me. If you only want to use one fund, I think VT (a world stock index fund) or at least VTI (a total US stock market index fund) would be better than VOO (the S&P 500 index composed of only large cap US stocks).
Are short-term Treasuries a reasonable bond holding? Yes, they are. This is a classic example of “taking your risk on the equity side.” Treasuries are very safe bonds. Short-term bonds are very safe bonds. Combine the two, and you get ultra-safe bonds. Which is good, since there is plenty of risk being taken on the equity side. Buffett has never been a big fan of bonds, so nobody should be surprised to see him recommending bonds that are only a little different from cash. Short-term Treasuries minimize term risk, creditor risk, and inflation risk. There's a lot to be said for that. My own bond portfolio really isn't all that different from a bunch of short-term Treasuries.
More information here:
VFIAX vs. VOO: What Is the Best 500 Index Fund?
How Do You Evaluate and Compare Mutual Funds and Exchange Traded Funds?
The Bottom Line
Warren's point in his 2013 letter was that if you're not Warren Buffett, you should be buying index funds rather than individual stocks. Don't read anything more into it. Choose your own asset allocation carefully based on your own finances, goals, and investing behavior. And just know that 90/10 is not right for everyone.
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What do you think? Do you take investing advice from Warren Buffett? Why or why not? What do you think the point of his 2013 letter was?
Here is a more detailed analysis of this topic. I am curious what Dr. Dahle’s thoughts are on the comparative rates of failure. I was surprised by only a 2.3% failure rate.
https://seekingalpha.com/article/4239453-buffetts-barbell-90-percent-equities-and-10-percent-cash-for-his-wife-and-berkshire-and-maybe
The most important thing when talking about “failure” is the definition of failure.
The next most important thing is the time period in which you are measuring failure.
So apparently failure is running out of money in rolling 30 year time periods, a la the Trinity study, while withdrawing 4%. Well, no surprise that 4% is a pretty darn safe withdrawal rate. If you look at the Trinity study data, you see that at 4% failure rates range from 65% with a 100% bond portfolio to 4% with a 50/50 portfolio. It’s 2% with a 100% stock portfolio and 0% with a 75/25 portfolio. So maybe 75/25 is better than Warren’s 90/10. But either way, it’s fine. Anything between 50% and 100% stock worked out fine in the past. The stocks help with inflation and the bonds help with volatility, both are bad for retirees making withdrawals.
Both the Trinity study and the Estrada study used the S&P 500 for stocks. The Trinity study used corporate bonds and Estrada presumably used short term treasuries. I actually prefer the Estrada approach of taking risk on the equity side.
The idea of having a high equity percentage throughout retirement or even a rising equity percentage throughout retirement feels a little like performance chasing, especially given the returns of LC US stocks over the last decade, but it has some merit when you consider that perhaps inflation, especially unexpected inflation, is a bigger deal than volatility over a long retirement. That concern may also be easily addressed by using TIPS instead of nominal bonds.
This is a very popular topic on Bogleheads the last few years. A great live illustration of recency bias.
Ah, the Bogleheads—where the wisdom of crowds meets the folly of human psychology. Every hedge fund loss? Vindication! Every active fund win? Random luck. And let’s not forget the irony of investors hyperventilating over a 2% dip while preaching “stay the course.” Meanwhile, hindsight warriors declare the three-fund approach the only rational path—as if they never entertained any doubts. But the real kicker? The newcomers who fall in line, parroting the orthodoxy, lest they be branded financial heretics.
Just curious when you’ve seen Bogleheads “hyperventilating over a 2% dip,” Tom? Straw man much?
Well…there are Bogleheads and there are Bogleheads. Lots of very experienced investors with decades of practice staying the course and nuanced views of asset allocation and investing. And people who just wandered in this morning. And everything in between. So I understand both of your points of view.
I’ve found Bogleheads incredibly helpful over the years. I’d be a significantly poorer individual without the advice I’ve gotten there.
But they’re prone to behavioral errors just like every other normal person; especially the ones who post there but don’t actually follow the advice in the wiki.
I mean there’s roughly 120,000 registered users on their website with 2,000 posts daily so you can “find” whatever you want to “find” with nice confirmation bias.
[Non-contributory ad hominem comment removed.]
You mention having a trust/trustee for your spouse/family. How does one select a trustee and have you written about it?
We have a couple of trusts. Katie and I are trustees on both of them. One of the them, a SLAT, requires a separate distribution trustee which is a family member. The other, a Utah asset protection trust for the house, doesn’t need a separate trustee.
There are so many different types of trusts that a “How to select a trustee” post would be pretty involved but it’s probably a good topic for a post or podcast. Thanks for the great suggestion!
Why not just buy class B Berkshire Hathaway shares for the taxable portion of your portfolio since it has stock and bond allocation, has the benefit of a great stock picker and doesn’t pay any dividends (super tax efficient)?
Other than the fact that it is a single stock…..
At any rate, I do own a lot of Berkshire….via VTI. It’s the 9th biggest holding of VTI.
It is interesting that Buffett doesn’t recommend that for his wife’s trustee though eh? Maybe he knows something we don’t.
@WCI,
As you correctly point out this is a very specific condition over a short time frame that may or may not even come to pass should his wife predecease him.
The bigger picture would be to understand the larger picture set aside for children and beyond.
Also, like you say, what is important about the 10% is that it can most likely cover 100% of the risk of the situation. That is really the most conservative approach anyone needs — what are you going to do if your equities go to near zero, how long can you live on the rest without needing to sell the equities. Some, like the original founder of AAII.com define risk as the ability for you not to run out of money no matter what the market throws at you and not your equity/bond allocation, which as we all know can both go down at the same time depending on how they are allocated.
So, a 100% equity portfolio of a single ETF like VOO or SPY is only as risky as you make it by what else you are doing, and your mental ability to understand how it all works together.