Ninety Ten Investment Strategy (90 - 10 Investment Strategy)

Definition

The term 90 - 10 strategy refers to the creation of an investment portfolio that allocates 90% of the fund's assets to interest bearing securities and 10% to higher risk securities.  The 90 - 10 strategy is a relatively conservative approach to investing.

Explanation

A 90 - 10 portfolio allocates 90% of its funds to interest bearing securities, such as bonds, and 10% of its funds to higher risk securities, such as common stock.  The objective of a 90 - 10 portfolio is the preservation of capital.  This strategy is relatively conservative, and is well-suited to investors with low risk tolerance scores.

A retired investor may be concerned that a steep drop in the stock market may force them to sell securities at bargain prices because they are needed as a source of income.  A 90 - 10 portfolio allows the investor to enjoy a slight lift in return when the stock market is performing well.  It also prevents the investor from sustaining devastating losses when the market is performing poorly.

Example

If an investor's bond portfolio provides them with a 5% annual return and the stock market is up 10%, then their total return would be 0.90 x 5% + 0.10 x 10%, or 4.5% + 1%, or 5.5%.  However, if the stock market is down 10%, then their total return would be 0.90 x 5% - 0.10 x 10%, or 4.5% - 1%, or 3.5%.  

Related Terms

risk of ruin, conservative investing strategy, preservation of capital, all equities strategy, capital growth strategy