Investment Portfolio Asset Allocation Examples

Model #: The Moderate Portfolio

This portfolio is designed to be a balance. Its not too conservative, but its not as risky as other portfolios as well. I would consider this portfolio for anyone who is 30-50, and is normal for risk tolerance. This group still has time on their side, so they can handle some return, but at the same time, dont want a ton of risk.

Heres what this portfolio looks like:

• 25% Large Cap Stocks
• 25% Small Cap Stocks
• 15% International Stock Market Index
• 5% Emerging Market Stocks
• 30% Bond Market Index

As you can see, this portfolio is mostly stock focused, with a larger percentage in small cap and international equities than other portfolios so far. This will provide more growth potential over time, but it also increases the risk of the portfolio, so time is important.

Determine How Much You’ll Need To Save

You’ll have to make some kind of estimate for the amount you need to save. For a house you want to buy in three years, that may be relatively easy. You look at the price of similar houses, calculate the amount you’ll need for 20% down, and maybe add a few percent more in case the value goes up or for closing costs.

As the goal gets more complex, so does the estimate. For example, if your goal is to pay for tuition at your alma mater for your 3-year-old, you’ll need to make some assumptions. Let’s say four years of tuition right now is $40,000 and you think tuition will go up at an amount 2% over the general rate of inflation. Pull out your favorite spreadsheet, such as Excel, andput this into a cell:

=$53,834.73

Not defining your investing goals is about as smart as heading down a canyon unprepared to deal with its obstacles, like the 120-foot rappel on the other side of this pommel horse.

The first number is the annual return. The second is the number of years. The third is the amount paid in each year, and the last is the amount you have now. This calculation will tell you what that $40,000 tuition bill will be in 15 years. So you need $54,000 in today’s money to reach that goal.

Estimating the amount for your retirement nest egg is even more complex. Manystudies and evenentire books have been written on the subject.

The basic process is:

Portfolio Asset Allocation By Age Beginners To Retirees

Financially reviewed by Patrick Flood, CFA.

Asset allocation refers to the ratio among different asset types in ones investment portfolio. Here well look at how to set ones portfolio asset allocation by age and risk tolerance, from young beginners to retirees, including calculations and examples.

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How Much Complexity Do You Desire In Your Investment Portfolio

The more asset classes you add, the more complex your portfolio becomes. That does several things:

• A more complex portfolio might give you the opportunity for increased returns, especially if a lot of the asset classes are high-risk/high-return classes.

• It is guaranteed to increase your investment costs and the time required to manage the portfolio.

You might not mind complexity, but you also need to consider your spouse and/or heirs. It’s not uncommon for heirs to discover that the portfolio of their recently deceased beloved contains 200 individual stocks and another 50 mutual funds. Guess what they’re going to do when you die with a portfolio like that? They’re going to run to the nearest Edward Jones store and hire those people to do it for them.

You also need to keep in mind that if your portfolio is split among five or more different types of accounts, then having 15 different asset classes is going to make keeping track of it immensely complex. But if all your investments are inone Roth IRA then perhaps that isn’t such an issue.

Building A Balanced Portfolio: Everything You Need To Know

Advisorsavvy Blog, Investing

The last few years have been a wild ride for investors trying to second-guess market trends. Adding to the uncertainty have been the ups and downs of the global COVID-19 pandemic response on a political level. Its no wonder that many people are asking themselves how to build a balanced portfolio. Lets take a look at everything you need to know for creating a balanced portfolio that can chart a course through challenging times.

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William Bernsteins No Brainer Portfolio

Another simple and aggressive portfolio thats 75% in equities. Note the straightforward 25% split between asset classes. This is because passive investors understand that there is no correct answer to asset allocation.

Fine grain allocations may look impressively scientific but are no more likely to provide a better return than a crude four-way slice of the pie.

N.B. Ive thrown in alternative solutions for UK domestic equity and government bonds for this one.

Time Is Your Best Friend

Having time not just enables you to exploit intensifying and the time estimation of cash, however, it additionally implies you can place a greater amount of your portfolio into higher hazard/return ventures, to be specific stocks. A few awful years in the securities exchange will probably appear as just an unimportant blip quite a while from now.

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What Is Asset Allocation And Why Is It Important

Asset allocation is how you weigh stocks, bonds, cash and other investments inside your portfolio. It is an essential part of retirement planning and investing.

Asset allocation divides your investment portfolio by percentage into different asset classes. For example, you could have an asset allocation of 60 percent stocks, 25 percent bonds and 15 percent cash equivalent assets, such as certificates of deposit .

Asset allocation is important because it can help protect your portfolio against significant loss and keep you focused on your long-term investing goals.

Returns of stocks, bonds and cash tend to move in different directions at the same time. By investing in more than one asset class, you put yourself in a better position to counteract losses.

Asset allocation intertwines with diversification another important investing concept.

You can think of asset allocation as laying the foundation for your portfolios structure.

Diversification builds on top of this by spreading investment risk among different subcategories within those asset classes.

It is possible to have excellent asset allocation but little diversification.

For example, imagine our example earlier, where your portfolio holds 60 percent stocks, 25 percent bonds and 15 percent cash equivalents.

Another way to achieve diversification is with mutual funds or exchange-traded funds that track broad indexes like the S& P 500 or different subcategories, such as growth, value and company size.

Asset Allocation At A Glance

• Asset allocation refers to the percentage of different assets contained in an investment portfolio. It may include stocks, bonds, cash, and more.
• Different factors may determine asset allocation, such as time horizon and risk tolerance.
• You can reduce your risk by holding total-market index funds in your portfolio, both for stocks and bonds. Stocks will still be riskier, but a total-market fund will reduce risk somewhat.

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When Should You Be In A Balanced Portfolio

There are no hard and fast rules as to the type of investments each individual should choose. There are, however, typical situations when balanced portfolios are a good option. Bear in mind that you may not achieve the highest returns as markets tick upward. That said, as mentioned above, you may also avoid losses in market downturns because of a balanced portfolio allocation.

Consider a balanced portfolio if your situation is like any of these:

• Youre not experienced in investing and want a good compromise between achieving long-term goals while avoiding high risk.
• As a retiree, you feel comfortable with accepting variances in your account based on market performance.
• You are in a younger age category with goals like as buying a home or saving for a major vacation 5 to 10 years down the road.
• Your investment runway is long but you dont want to weather big fluctuations in your account over time.

Does Risk Tolerance Change Over Time

For new investors at any age, the fear of losing equity may drive panic selling at low points rather than staying the course. And those who have a high-risk tolerance may surf the investment waves trying to make a quick profit.

Those with a lengthy investment horizon might be able to stomach the market retractions compared to retirees. Young investors who are earning income and have a longer investment timeline have more leeway to take risks. A balanced portfolio may seem too staid for young people who might prefer to have a larger allocation in stocks. However, as people move into stages of life with more consideration for wealth accumulation and retirement, tolerance for risk drops accordingly.

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Asset Allocation Mutual Funds And Etfs

In case you didnt know, a target date fund does all this asset allocation stuff for you behind the scenes. This is a type of mutual fund that you select based on your intended retirement year the target date and it shifts away from stocks into bonds as you age and near retirement, just like weve discussed. Youll typically have a range of these to choose from in your 401k from your employer. Read the details on these mutual funds to make sure they match your risk tolerance. It may not immediately be clear when or how quickly the shift from stocks to bonds occurs.

In the interest of full disclosure, I usually find target date funds to be too conservative and suboptimal in their attempted one-size-fits-most approach. You also typically pay a bit extra in fees for their convenience. That said, target date funds are great for someone wanting to be completely hands-off theyre as simple as it gets.

Then there are some slightly more advanced, exotic products that use leverage to provide enhanced exposure to a diversified mix of assets. Their details are beyond the scope of this article, but Ill mention them briefly. NTSX is 90/60 and SWAN is 70/90.

Dirty Harry Vs Juliet Bravo

The lazy portfolios youll read about on the Internet and in books are mostly US orientated. But Monevator has converted them for UK readers using index funds and ETFs chosen from our market.

Cost rules our decision making. Every fund is selected on the basis that:

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Total Market Approach Vs Tilting Portfolio

One very reasonable way to invest is to just buy all the stocks and all the bonds. For example, you could design a portfolio that is 1/3 Total Stock Market Index , 1/3 Total Bond Market Index , and 1/3 Total International Stock Index . This has many benefits, including ultimate diversification, very low costs, and simplicity.

However, there are also good arguments for tilting the stock portions of your portfolio to riskier assets. That means holding MORE than the market weights of riskier assets such as value stocks, small stocks, junk bonds, and emerging market stocks. The hope is that you’ll have higher long-term returns to compensate you for taking the additional risk.

An example of a tilted portfolio would be 25% Total Stock Market, 10% Small Value, 25% Total International Stock, 10% Emerging Markets, 25% Total Bond Market, and 5% Junk Bonds.

How Much to Tilt Your Portfolio?

Once you’ve decided you WANT to tilt your portfolio to some riskier asset class, you’re left with the decision of how much to tilt it. The more you tilt, the more theoretical return you will get, but you have to weigh that against the loss of diversification and the additional risk. The reason small stocks have a higher expected return is that the risk is higher that they may not get that expected return, even in the long run. It’s a bit of a Catch-22.

Factors That Can Affect Asset Allocation

The process of determining the right mix of assets for your portfolio is a very personal one. When making investment decisions, an investors asset allocation decision is influenced by various factors such as personal financial goals and objectives, risk appetite, and investment horizon. Lets understand these factors.

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Gradually Changing Your Portfolio From Moderate To Conservative

Keep in mind that the above portfolio recommendations are not intended to be exact blueprints. Instead, feel free to switch between portfolio structures depending on how close you are to retirement, how much money you can afford to invest, economic circumstances, and whether your current priority is maximum profits or maximum protection.

Most investors recommend shifting your portfolio from moderate , to moderately conservative , and then finally to fully conservative .

For example’s sake, a moderate portfolio would contain about 60% stocks and 40% bonds/cash/precious metals, whereas a moderately conservative portfolio would contain about 40% stocks and 60% bonds/cash/precious metals, and a conservative portfolio would only contain about 20% stocks and 80% bonds/cash/precious metals.

However, you shouldn’t make these shifts suddenly they should be implemented over time in combination with thorough research and the help of a qualified financial adviser.

Rick Ferris Core Four Portfolio

Ferris 60:40 split between equities and bonds is another common convention, broadly indicating a portfolio set for moderate growth and volatility.

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Examples Of Asset Allocation Models

Many investment companies and robo-advisors use asset allocation models to simplify the process for clients.

Asset allocation can range from conservative to very aggressive.

Aggressive models hold more stock in their portfolio than moderate models. Similarly, moderate models have more stock than conservative ones.

Keep in mind that past performance does not guarantee future returns. Examples of asset allocation models below are for educational purposes only and are not intended to replace the advice of a certified financial professional.

Asset Allocation Models By Age A Table

To illustrate this idea of asset allocation shifting as time passes, below is a table showing various hypothetical asset allocations models by age for three hypothetical risk tolerances. This will give you an idea of what yours might look like and how it will change as you get older. As a simplistic example, Ill use:

Low risk tolerance = age in bondsMedium risk tolerance = age minus 10High risk tolerance = age minus 20

Remember, asset allocation is written as a ratio of stocks to bonds, such as 80/20, which means 80% stocks and 20% bonds.

Vanguard has a useful page showing historical returns and risk metrics for different asset allocation models that may help your decision process. Once again, use this as an informational tool in your arsenal, but also remember that same performance seen on that page may not occur in the future.

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When To Consider Rebalancing

You can rebalance your portfolio based either on the calendar or on your investments. Many financial experts recommend that investors rebalance their portfolios on a regular time interval, such as every six or twelve months. The advantage of this method is that the calendar is a reminder of when you should consider rebalancing.

Others recommend rebalancing only when the relative weight of an asset class increases or decreases more than a certain percentage that youve identified in advance. The advantage of this method is that your investments tell you when to rebalance. In either case, rebalancing tends to work best when done on a relatively infrequent basis.