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Outbyte PC Repair FREEClear out junk files and repair common Windows errorsFree Scan →Outbyte Driver Updater FREEScan for outdated or missing drivers - takes under a minuteDriver Scan →Warren Buffett’s oft-cited approach is simple: own a low-cost index fund for broad stock-market exposure, keep some money in short-term government bonds, and resist selling stocks just because markets have fallen. In Berkshire Hathaway’s 2013 shareholder letter, he gave a trustee for his wife’s benefit a specific example: 90% in a very low-cost S&P 500 index fund and 10% in short-term government bonds. That was an instruction for one estate-trust situation—not a universal portfolio formula or protection against losses.
What Buffett’s strategy actually is
Buffett’s advice is aimed at the nonprofessional investor. Instead of trying to identify individual winning companies or predict the market’s next move, an investor can buy a low-cost fund tracking a broad index such as the S&P 500. That gives exposure to a cross-section of businesses, while keeping costs and the temptation to make frequent changes in check.
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In his 2013 letter, published in 2014, Buffett wrote: “Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund.” The instruction was for the trustee handling money for his wife’s benefit. It is an example of his approach, not a reported investment result, a forecast, or a claim that this mix prevents losses in a crash. Read the 2013 Berkshire Hathaway chairman’s letter.
Why it can help an investor stay the course
Market declines can make investors want to sell after prices have already fallen. Buffett’s broader point is to avoid letting alarming news or depressed prices prompt a start-and-stop approach to investing. A diversified index fund reduces the need to choose individual stocks, and low costs leave less of the investment’s return consumed by expenses. Buffett has also warned against high costs and fad-driven decisions; his 2004 chairman’s letter discusses the harm market-timing behavior can do to investors.
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This is a discipline for remaining invested, not a way to sidestep market risk. An index fund can fall when the securities it tracks fall, and there is no guarantee it will recover by a particular date. The SEC notes that index funds can also have tracking error, fees, and trading costs that cause them to lag their index. The SEC’s overview of index funds explains these risks.
What an index fund does—and what to check
An index fund is a mutual fund or exchange-traded fund that seeks to track a market index; investors cannot buy the index itself. Some funds hold every security in the index, while others use a sample. Because their methods and costs differ, “index fund” alone does not tell you whether a particular fund fits your needs. Passive management may reduce costs, but not every index fund is cheaper than every actively managed fund.
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Before choosing a fund, review its prospectus and latest shareholder report, and compare:
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- Total costs: Look at the ongoing expense ratio as well as transaction costs.
- Index and construction: Check which index the fund tracks, how that index selects and weights securities, and whether the fund holds all constituents or a sample.
- Tracking and fund risks: Review how closely the fund has tracked its index and what risks its documents identify.
- Fit: Consider whether the fund’s exposure and volatility suit the goal and the date you expect to need the money.
When 90/10 may not fit your situation
The right mix of stocks, bonds, and cash depends on the purpose of the money, your time horizon, and your tolerance for losses. Stocks can be very volatile over short periods, so a stock-heavy portfolio may be unsuitable for money needed soon. As a goal approaches or your circumstances change, your allocation may need to change too. The SEC’s guide to asset allocation, diversification, and rebalancing explains why there is no single allocation for every financial goal.
Holding more than one asset category may smooth portfolio returns and reduce risk, but it does not eliminate it. Bonds carry their own risks and generally have more modest return potential than stocks; cash equivalents can lose purchasing power to inflation. A 90/10 allocation could still lose value, and the example should not be applied automatically if you are near retirement, expect to spend the money soon, or have little tolerance for declines.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.Prepare your finances before investing for the long term
A low-effort investing plan does not replace basic financial preparation. High-interest credit-card debt and the lack of emergency savings can leave you needing to sell investments at a bad time. The SEC recommends addressing high-interest debt, maintaining emergency savings, investing regularly, and considering diversified investments in retirement accounts for long-term goals. See Investor.gov’s guide to building wealth through saving and investing.
Once your foundation is in place, regular contributions can make the routine simpler than trying to time an ideal entry point. You still need to choose an appropriate allocation and fund, and to review them when your goal or circumstances change; “low effort” does not mean “set a risky allocation and ignore it.”
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