Investment portfolios: Asset allocation models | Vanguard (2024)

FAQs

What are the basic asset allocation models for your portfolio? ›

Usually expressed on a percentage basis, your asset allocation is what portion of your total portfolio you'll invest in different asset classes, like stocks, bonds and cash or cash equivalents.

A good asset allocation varies by individual and can depend on various factors, including age, financial targets, and appetite for risk. Historically, an asset allocation of 60% stocks and 40% bonds was considered optimal.

Many financial advisors recommend a 60/40 asset allocation between stocks and fixed income to take advantage of growth while keeping up your defenses.

Equities (stocks), fixed-income (bonds), and cash (or its equivalent) are three asset classes every investor should be familiar with when considering an investment strategy. While there are many asset classes, this article will focus on the primary three.

There are four main asset classes – cash, fixed income, equities, and property – and it's likely your portfolio covers all four areas even if you're not familiar with the term.

There are several types of asset allocation strategies based on investment goals, risk tolerance, time frames and diversification. The most common forms of asset allocation are: strategic, dynamic, tactical, and core-satellite.

Strategic Asset Allocation Example

Smith, who has a conservative approach to investing and is five years away from retirement, has a strategic asset allocation of 40% equities / 40% fixed income / 20% cash.

Asset allocation is the process of dividing the money in your investment portfolio among stocks, bonds and cash. The goal is to align your asset allocation with your tolerance for risk and time horizon.

The Rule of 100 determines the percentage of stocks you should hold by subtracting your age from 100. If you are 60, for example, the Rule of 100 advises holding 40% of your portfolio in stocks. The Rule of 110 evolved from the Rule of 100 because people are generally living longer.

What is a good asset allocation strategy? ›

Your ideal asset allocation is the mix of investments, from most aggressive to safest, that will earn the total return over time that you need. The mix includes stocks, bonds, and cash or money market securities. The percentage of your portfolio you devote to each depends on your time frame and your tolerance for risk.

The common rule of asset allocation by age is that you should hold a percentage of stocks that is equal to 100 minus your age. So if you're 40, you should hold 60% of your portfolio in stocks. Since life expectancy is growing, changing that rule to 110 minus your age or 120 minus your age may be more appropriate.

If you are a moderate-risk investor, it's best to start with a 60-30-10 or 70-20-10 allocation. Those of you who have a 60-40 allocation can also add a touch of gold to their portfolios for better diversification. If you are conservative, then 50-40-10 or 50-30-20 is a good way to start off on your investment journey.

Stocks and bonds are generally considered a portfolio's core building blocks, though you may grow a portfolio with many different types of assets—including real estate, gold, paintings, and other art collectibles. Diversification is a key concept in portfolio management.

The foundation of a balanced portfolio is spreading your investment dollars across the major asset classes like stocks, bonds, real estate, and cash equivalents. Each asset class has different risk and return profiles, so the right mix depends on factors like risk tolerance and investment timeline.

Asset allocation spreads your money among different types of investments (stocks, bonds, and short-term securities) so that you can manage volatility and growth potential over time. Investing in a variety of securities with your asset class mix provides further diversification.

Asset allocation involves dividing your investments among different assets, such as stocks, bonds, and cash. The asset allocation decision is a personal one. The allocation that works best for you changes at different times in your life, depending on how long you have to invest and your ability to tolerate risk.

A model portfolio is a collection of assets that can be attributed to an investors portfolio and continually managed by professional investment managers. Model portfolios employ a diversified investment approach to target a particular balance of return and risk or portfolio objective.