Crafting an investment portfolio depends on your goals and risk appetite. For many investors, choosing a simple percentage split is a sensible guideline to help maintain a balance between potential return and stability. Of course, everyone would prefer to have all the upside with no risk, but each of us must personally decide where we are comfortable.
A 70/30 portfolio signifies that within your investments, 70 percent are allocated to stocks, with the remaining 30 percent invested in fixed-income instruments like bonds. Since, over time, stocks have the potential for both higher returns and higher risks, the 70 percent is more aggressive than a traditional 60/40 split. Over the very long-term period of 1926 to 2019, a 70/30 portfolio has an average return of 9.21 percent. For a long-term investor, that's a healthy appreciation. Out of the 94 years, only 23 years had a loss in that allocation, with the worst being over 31 percent in 1931.1
What influences asset allocation strategy?
While everyone is different, typically, younger investors may have more aggressive goals and risk tolerance. The reason is that they have a longer journey toward retirement and thus can weather a few storms along the way in pursuit of higher returns. However, while stocks can appreciate impressively over time, they can also lose value at inopportune moments. For that reason, investors with short investment time horizons may want a more conservative strategy. Your time horizon is the length of time you anticipate working toward a particular goal.
For example, you might be saving toward the down payment for a home, which is likely a short-term objective. At the same time, you may be building a college fund for your children and simultaneously saving for your retirement. Each of these events has a different time horizon and, as a result, may warrant a different investing strategy.
Asset allocation is one factor in portfolio management.
As the Securities and Exchange Commission points out in its advice to beginning investors, stocks historically have the most significant risk and the greatest rewards among the three major asset categories. This result is because stocks hit home runs but also strike out, according to the SEC.2 It’s worth recalling the famous advice from legendary investor Warren Buffett that there are no called strikes in investing—if you don’t swing, you can’t strike out. In other words, choose your pitch carefully. In Buffett's view, which stocks you select is at least as important as asset balance. He subscribes to the buy-and-hold philosophy and only buys stock in companies he believes in.
Bonds are typically less volatile than stocks but also tend to have more conservative growth opportunities. That’s why investors like to use them for the “hedge” portion of their investments, so that if stocks decline, they may be able to manage exposure. Cash and cash alternatives like treasury bills and money market funds are considered the safest investments but also offer the lowest returns on average of the three major categories. Finally, don't overlook potential alternatives for investment, like real estate, commodities, and private equities. Depending on your individual goals, these may offer valuable opportunities.
1 advisors.vanguard.com. ”Portfolio allocations: Historical index risk/return (1926-2019)”
2 investor.gov. “Beginner’s Guide to Asset Allocation, Diversification, and Rebalancing”
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.
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.
Past performance is not a guarantee or indication of future results. All investments have an inherent level of risk. The value of your investment will fluctuate with the value of the underlying investments. You could receive back less than you initially invested and there is no guarantee that you will receive any income.