Retail investors may fear dipping their toes into a volatile market amid the global oil supply crisis, geopolitical tensions, war in West Asia and other uncertainties. Amid this, Berkshire Hathaway Founder-Chairman Warren Buffett’s simple but key investment lessons can be good yardstick.
The ‘Oracle of Omaha’ as he is known, is a big proponent of keeping things simple. For retail investors, who may lack technical and in-depth stock market background, Buffett suggests the 90/10 rule.
According to the billionaire, average investors should divide your funds as follows: Put 90% into low-cost S&P 500 index fund (for India the Nifty 50, Nifty 500 and BSE 500 are equivalent alternatives), and the remaining 10% in short-term government bonds i.e. government securities (G-sec).
Why does Warren Buffett back 90/10 investment mantra?
The ace investor believes the allocation gives investors broader market exposure and keeps them insulated from devastating crashes. He believes that diversifying your bets works best for ordinary investors compared to chasing the markets or concentrating all your eggs in a few baskets.
In the 2013 letter to Berkshire Hathaway AGM letter to shareholders Buffett said his will stipulates the same 90/10 method be followed for his wife’s interests. “I believe the trust’s long-term results from this policy will be superior to those attained by most investors—whether pension funds, institutions, or individuals—who employ high-fee managers,” he wrote.
Radhika Gupta’s ‘dal chawal’ funda explained
Edelweiss Mutual Fund Chief Radhika Gupta — vocal on the benefits of mutual funds and SIPs, has a similar view on investment for retail investors. She advised followers on social media platform X (formerly Twitter) to ensure 80% of their investment portfolio comprises “dal-chawal funds”. Gupta cautioned that concentrating your portfolio to narrow choices is “a danger in these times”.
What is dal-chawal funds? Ordinary, non-glamourous stocks — “hybrid funds, diversified equity funds … Broad-based, all-weather stuff that span a range of sectors”, according to Gupta. For example, the balanced advantage and aggressive hybrid type funds, which include flexi, multi, large and mid, broad-based 250-500 index funds.
“Active or passive doesn’t matter — the point is not a narrow theme-based fund that works in one cycle and not in the next,” she added, also calling these “forever funds”.
How do these methods benefit ordinary investors?
For the common retail investors lacking complex analytics for their stock choices, following the 90/10 method or choice of ‘dal chawal funds’ is a straightforward and easy strategy.
It also provides diversification across various market capitalisations, stability from bonds, removes emotional biases, and allows the investor to take advantage of the compounding power of equities. As per Gupta, investing in broad-based funds ensures you’re covered through various market cycles and do not take hits because of over-allocation in one or two narrow sectors that may be on a downward spiral.
Most importantly, Buffett and Gupta’s methods require no active intervention during market fluctuations, thus keeping investors away from common mistakes like panic selling during a market downturn.
Gupta is also a big proponent of automating part of your earnings into SIPs and has often warned against blindly following influencers who push “crazy investment opportunities” that are meant for more seasoned players. “The most expensive fund is the one you bought for last year’s returns. Return chasing feels rational. It’s usually late. Consistency looks boring. It’s usually effective,” she feels.
Disclaimer: This story is for educational purposes only. The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
