Asset allocation is an important aspect of portfolio diversification, as well as a means to help investors manage their exposure to risk.
Asset allocation is the process of selecting a range of different types of investments, or assets, to create a varied or diversified investment portfolio.
Asset allocation typically depends on a number of factors, which can include:
- Age and investment horizon
- Tolerance for risk
- Expected rate of return
- Personal investment philosophy
Selecting the right allocation of assets also can be an integral part of reaching your investment goals – too much exposure to risk might result in illiquidity, while too little risk could result in less-than-desirable returns.
Below we’ll discuss the 70/30 asset allocation strategy.
Crafting a 70/30 Investment Portfolio
With a 70/30 investment portfolio, 70 percent of your capital is invested in stocks, and 30 percent is invested in fixed-income products, such as bonds, CDs, and fixed-income exchange-traded and mutual funds. The 70/30 asset allocation strategy is an alternative to the potentially less-risky 60/40 model or the riskier 80/20 allocation strategy.
There can be a lot of variation within the 70/30 strategy, though, especially with equity stocks. In an attempt to manage risk, you could opt for the perceived stability of blue-chip tech, manufacturing, or financial stocks, which can generate regular but smaller returns. Alternatively, if you have a greater appetite for risk, you could allocate a heavier mix of your investment capital to mid- and small-cap stocks. These investments can be significantly risker, but they also may have the potential to generate significantly higher returns. A lot of the decision of where to place your 70-percent equity capital depends on how long you can hold onto the investment.
Your 30-percent asset allocation to bonds, meanwhile, also can affect the potential rate of return for your portfolio. Interest rates continue to rise as a result of escalating inflation and Federal tapering, which will lower the return of existing bond holdings. Investing in shorter-duration fixed-income debt instruments is one way investors could potentially alleviate some of the drag on bonds caused by rising interest rates.
The Bottom Line
As noted earlier, your choice of asset allocation strategy depends largely on your age, investment horizon, and appetite for risk. If you are young, you’ll want your portfolio to work harder at generating returns than someone who is a few years into their retirement. You’ll likely be more open to taking on increased risk since you have a much longer investment horizon, so you may opt for an 80/20 asset allocation.
Older investors, meanwhile, typically seek to reduce their exposure to risk and preserve capital. They may opt for a 60/40 asset allocation strategy since their investment horizon is shorter. A certified financial professional can help you determine which investment strategy best meets your financial goals and fits within an acceptable tolerance for risk.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation. Neither Asset Allocation nor Diversification guarantee a profit or protect against a loss in a declining market. They are methods used to help manage investment risk.