When the topic of investment strategy arises, the name Warren Buffett is almost certain to be mentioned.
As one of the most successful investors in American history, Buffett has delivered an average annual return of nearly 19% for Berkshire Hathaway shareholders over a span of more than 60 years. That performance significantly financial fundamentals.
However, he suggests a different approach for the average investor. For those who lack the time or desire to research individual companies and manage a portfolio, he recommends low-cost index funds and an allocation that many experts view as aggressive: 90% in equities and 10% in short-term government bonds.
Can the typical, novice investor maintain such a heavy commitment to stocks when the market experiences a sharp downturn?
A ‘human side’ to consider
Ryan Dykmans, CFA, president and chief investment officer at Dunham & Associates Investment Counsel in San Diego, suggests that the 90/10 portfolio might be best suited for a specific type of investor.
“I have a great deal of respect for Buffett, but the ‘average’ investor may not have Buffett’s time horizon, liquidity, or temperament and discipline,” Dykmans told Yahoo Finance. “For a younger investor with decades ahead and the ability to remain invested, a 90/10 allocation could maximize long-term gains. But for someone nearing retirement, drawing income from the portfolio, or likely to lose sleep and force an emotional strategy change during a major decline — it may be too aggressive.”
He added that while higher equity exposure can boost long-term return potential, it also brings the risk of more severe drawdowns. “Ultimately, the right allocation has to fit the individual investor, including not only their ability to take risk, but also their willingness to take risk.”
He noted that there is also a “human side” to consider.
“Research shows people feel losses much more harshly than equivalent gains — the old adage of ‘the pain of a loss outweighs the joy of a gain.’ That reaction can become even more powerful during a major market decline when an investor is 90% invested in stocks.”
Dykmans argues that the ideal allocation is one that an investor can comfortably maintain, even when market news is at its worst.
Greedy or fearful?
Buffett’s perspective on declining <a You want to be greedy when others are fearful. You want to be fearful when others are greedy."
Dykmans believes this guidance remains highly relevant.
“It addresses the hardest part of investing — managing emotions. We believe discipline matters most when markets are testing it,” he added. “I would also add two more Buffett principles: ‘Look for a margin of safety, and do not confuse a rising price with lower risk.’ Markets can become overly optimistic or overly pessimistic. A sound process helps investors avoid chasing either extreme.”
Buffett has also emphasized that the most vital quality for an investor “is temperament, not intellect.”
“Following those rules, the ‘know-nothing’ investor who both diversifies and keeps his costs minimal is virtually certain to get satisfactory results,” Buffett wrote in his 2013 letter to Berkshire Hathaway shareholders. “Indeed, the unsophisticated investor who is realistic about his shortcomings is likely to obtain better long-term results than the knowledgeable professional who is blind to even a single weakness.”
