What is the 90 10 rule in spending?

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By Nick

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Looking for a simple investment strategy for retirement savings? Consider the 90/10 rule, which involves putting 90% of your capital into low-cost S&P 500 index funds and the remaining 10% into short-term government bonds. This approach offers diversification and the potential for high returns in the stock market while also protecting against volatility. It’s a suggested benchmark that can be adjusted to fit your risk tolerance. So why not give it a try?

The 90/10 Rule in Investing: A Simple Strategy for Retirement Savings

As we plan for our retirement, one of the most important decisions we have to make is how to invest our money. With so many investment options available, it can be overwhelming to decide where to put our hard-earned money. That’s where the 90/10 investing strategy comes in.

What is the 90/10 Investing Rule?

The 90/10 investing strategy for retirement savings involves allocating 90% of one’s investment capital in low-cost S&P 500 index funds and the remaining 10% in short-term government bonds. This rule is a suggested benchmark that investors can easily modify to reflect their tolerance to investment risk.

The S&P 500 index is a collection of 500 large-cap stocks that are widely considered to be representative of the overall U.S. stock market. By investing in an S&P 500 index fund, you are essentially investing in the entire U.S. stock market, which historically has provided solid returns over the long-term.

Short-term government bonds, on the other hand, are considered to be a low-risk investment option. They provide a fixed rate of return and are backed by the U.S. government, making them a safe investment choice for those who are risk-averse.

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Why Does the 90/10 Rule Work?

The 90/10 investing rule is based on the idea of diversification. By investing in both stocks and bonds, you are spreading your risk across different asset classes. Stocks are generally considered to be riskier than bonds, but they also offer higher potential returns. Bonds, on the other hand, are considered to be a safer investment option, but they offer lower potential returns.

By investing 90% of your capital in stocks and 10% in bonds, you are taking advantage of the potential for high returns in the stock market while also protecting yourself from the volatility that comes with investing solely in stocks.

How to Implement the 90/10 Rule

Implementing the 90/10 investing rule is simple. First, determine how much money you want to allocate to stocks and how much you want to allocate to bonds. For example, if you have $100,000 to invest, you would invest $90,000 in an S&P 500 index fund and $10,000 in short-term government bonds.

Once you have determined your allocation, you can either invest in individual stocks and bonds or invest in mutual funds or exchange-traded funds (ETFs) that track the S&P 500 index and short-term government bonds.

Final Thoughts

The 90/10 investing rule is a simple yet effective strategy for retirement savings. By investing 90% of your capital in low-cost S&P 500 index funds and 10% in short-term government bonds, you are taking advantage of the potential for high returns in the stock market while also protecting yourself from the volatility that comes with investing solely in stocks.

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In conclusion, the 90/10 investing rule is a suggested benchmark that investors can easily modify to reflect their tolerance to investment risk. By diversifying your investments across different asset classes, you can reduce your risk and potentially increase your returns over the long-term.

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