Investment portfolios may rely on more than placing different capital asset types at random into a single financial bucket. When seeking to improve performance, these portfolios may require allocation strategies involving splits between traditional capital assets (like stocks and bonds).
One time-honored plan has arguably been the 60/40 asset allocation strategy. But investors interested in growth potential might decide on a portfolio containing 80% equities (stocks) and 20% fixed-income instruments (bonds). This is known as an 80/20 asset allocation.
Risk versus Rewards
Investors might gravitate toward an 80/20 asset allocation because of this strategy’s growth prospects. The 80% side contains equities, potentially in the form of individual stocks, equity mutual funds, or exchange-traded funds (ETFs). Meanwhile, the 20% portion is comprised of fixed-income investments, which could include bond ETFs and mutual funds, municipal and government bonds, high-yield bond funds, or corporate bonds.
Returns from this allocation strategy can be higher than returns from a 60/40 asset allocation. But the risk is much higher, as more capital is dedicated to equities, which can be more volatile than their fixed-income counterparts.
Investors might prefer an 80/20 asset allocation strategy for the following reasons:
- They might want potentially higher returns and growth from their portfolio
- They might have a higher personal tolerance and appetite for risk
- They might have a longer investment timeline
Experts Weigh In
There is plenty of advice on the internet when it comes to investment allocation strategies. One prevalent thought is that “80/20 is the new 60/40.”
Scott Ladner with Horizon Investments told CNBC that a 60/40 allocation strategy could leave an investor with 40% of “dead money.” Instead, his belief was that the fixed-income portion could be cut in half, while the equity side might include some hedging.
Meanwhile, Aaron Levitt with MutualFunds.com (writing in late 2021) pointed out that low bond rates (especially against increasing Effective Federal Fund Rates from the Federal Reserve) might not “act as the cushion investors may be looking for.” Equities could provide more returns, but Levitt cautioned that “investors need not go gangbusters when reconfiguring their allocation,” adding that dividend stocks might be a good alternative.
What to Do?
Investors researching the internet might have questions about whether an 80/20 asset allocation can help reach specific financial goals. The answer here is to do the research, then work with a trusted financial planner to build an optimal portfolio. An 80/20 asset allocation is just one investment strategy. Working with a professional who is familiar with markets and income-growing instruments can offer advice and direction. The result can be an investment strategy that meets goals and objectives, while considering risk tolerance.
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 protects against loss in a declining market. They are methods used to help manage investment risk.