90 equity 10 fixed income refers to an asset allocation strategy where 90% of an investment portfolio is allocated to equities (stocks) and 10% is allocated to fixed income assets (bonds). This strategy is often discussed in the context of long-term investing and risk management.
Understanding the 90/10 Allocation
The 90/10 allocation is a strategy championed by Warren Buffett, who suggests this split between equities and fixed income as a simple yet effective way for individuals to manage their investments. The goal is to capture the higher growth potential of stocks while mitigating risk through a smaller allocation to more stable bonds. According to the reference, the strategy recommends investing 90% of one's investment capital toward low-cost stock-based index funds and the remaining 10% to short-term government bonds.
Key Components
- Equities (90%): Typically invested in low-cost stock-based index funds that provide broad market exposure.
- Fixed Income (10%): Generally allocated to short-term government bonds known for their relative safety and stability.
Example
To illustrate, if you have $100,000 to invest:
- $90,000 would be invested in stock-based index funds.
- $10,000 would be invested in short-term government bonds.
Benefits of a 90/10 Allocation
- Growth Potential: A significant allocation to equities allows for higher potential returns over the long term.
- Risk Mitigation: The 10% allocation to fixed income helps to cushion the portfolio during stock market downturns.
- Simplicity: This strategy is easy to understand and implement, making it suitable for both novice and experienced investors.
Considerations
While the 90/10 allocation can be a suitable starting point, it's important to consider individual circumstances such as:
- Risk Tolerance: Investors with a lower risk tolerance may prefer a more conservative allocation.
- Time Horizon: Those with a shorter time horizon may also opt for a more conservative approach.
- Financial Goals: Tailor the allocation to meet specific financial objectives, such as retirement or purchasing a home.
