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.
FAQs
So, if you are 30, 70% of your portfolio should supposedly consist of stocks. The rest would then be allocated to safer assets, such as bonds. But a lot of these rules don't work for everyone. For advice that reflects your personal circ*mstances, reach out to a financial advisor.
What is a 70 30 asset allocation? ›
This investment strategy seeks total return through exposure to a diversified portfolio of primarily equity, and to a lesser extent, fixed income asset classes with a target allocation of 70% equities and 30% fixed income. Target allocations can vary +/-5%.
What should my asset allocation be at 70? ›
At age 60–69, consider a moderate portfolio (60% stock, 35% bonds, 5% cash/cash investments); 70–79, moderately conservative (40% stock, 50% bonds, 10% cash/cash investments); 80 and above, conservative (20% stock, 50% bonds, 30% cash/cash investments).
What should my asset allocation be at 30? ›
For example, if you're 30, you should keep 70% of your portfolio in stocks.
What is the 80 20 rule vs 70 30? ›
An 80/20 portfolio operates along the same lines as a 70/30 portfolio, only you're allocating 80% of assets to stocks and 20% to fixed income. Again, the stock portion of an 80/20 portfolio could be held in individual stocks or a mix of equity mutual funds and ETFs.
What is a good mix of stocks and bonds in retirement? ›
The conservative allocation is composed of 15% large-cap stocks, 5% international stocks, 50% bonds and 30% cash investments. The moderately conservative allocation is 25% large-cap stocks, 5% small-cap stocks, 10% international stocks, 50% bonds and 10% cash investments.
What is the 70/30 rule in investing? ›
A 70/30 portfolio is an investment portfolio where 70% of investment capital is allocated to stocks and 30% to fixed-income securities, primarily bonds.
How much money do you need to retire with $100,000 a year income? ›
So, if you're aiming for $100,000 a year in retirement and also receiving Social Security checks, you'd need to have this amount in your portfolio: age 62: $2.1 million. age 67: $1.9 million. age 70: $1.8 million.
At what age do most people retire? ›
While the average retirement age for workers in the United States is 64, that number varies as a result of many factors, including your Social Security benefit, your retirement savings, any pensions you might have, and even the lifestyle you want to live in retirement.
What 3 things determine your asset allocation? ›
Choosing the allocation that's right for you
- Your goals—both short- and long-term.
- The number of years you have to invest.
- Your tolerance for risk.
A 70/30 asset allocation increases your equity holdings to 70% of your portfolio and decreases the bond holdings in your portfolio to 30%. In recent years, the 70/30 asset allocation has become more popular. But many investors still prefer a 60/40 portfolio based on lower risk tolerance.
What is the best asset allocation by age? ›
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.
How much do I need to invest to make $1000 a month? ›
A stock portfolio focused on dividends can generate $1,000 per month or more in perpetual passive income, Mircea Iosif wrote on Medium. “For example, at a 4% dividend yield, you would need a portfolio worth $300,000.
Is 70/30 a good asset allocation? ›
The 30% exposure to bonds buffers the risk of 70% equity exposure to some extent, besides providing stable returns. While asset allocation is generally governed by various factors including demographics and economics, the 70/30 rule may serve as a good starting point for most investors.
What does a 70/30 portfolio look like? ›
The US Stocks/Bonds 70/30 Portfolio contains 70% Stocks, 30% Bonds. Over the last 30 years (last update: May 2024), the portfolio has returned 8.84% annualized, with a maximum drawdown of -37.47%.
Which is better, 70/30 or 80/20? ›
So you'll find that most health plans with 70/30 coinsurance have lower premiums than an 80/20 plan. So, if you're mostly healthy and have a good emergency fund in place, it might be a good idea to look for a health plan with higher coinsurance.
What is the 70/30 rule in retirement? ›
The mistake most people make is assuming they must be out of debt before they start investing. In doing so, they miss out on the number one key to success in investing: TIME. The 70/30 Rule is simple: Live on 70% of your income, save 20%, and give 10% to your Church, or favorite charity.
What does 70/30 mean? ›
One popular arrangement is the 70/30 commission split, where one party receives 70% of the commission, and the other receives 30%.
What is the 70 30 trading rule? ›
ETFs based on global stock indexes can be used to create a 70/30 portfolio. These ETFs are broadly diversified and aim to replicate the global stock market. According to the 70/30 rule, you would use an ETF to invest 70 percent of your capital in developed countries, and 30 percent in emerging markets.
