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 circumstances, 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 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.
What is the average return of a 30 70 portfolio? ›
Under this analysis, a portfolio of 70% stocks and 30% bonds would have achieved a 10.5% annualized return. This might not sound too different from the all-stock portfolio's return but, consider what it would mean over the long run.
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).
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 is the perfect asset allocation? ›
One of the first things you learn as a new investor is to seek the best portfolio mix. Many financial advisors recommend a 60/40 asset allocation between stocks and fixed income to take advantage of growth while keeping up your defenses.
Is a 70 30 portfolio aggressive? ›
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.
What does Warren Buffett recommend now? ›
He owns a small bit of each in his portfolio for Berkshire, too. The two investments held in Berkshire Hathaway's portfolio that Buffett recommends more than anything else are two S&P 500 index funds. The SPDR S&P 500 ETF Trust (NYSEMKT: SPY) and the Vanguard S&P 500 ETF (NYSEMKT: VOO).
Why is 70 30 rule important? ›
The 70/30 Rule of Communication says a prospect should do 70% of the talking during a sales conversation and the sales person should only do 30% of the talking. That means the sales person is actually doing more listening during the sales call than anything else. I take this rule one step further and apply it to life.
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.
Is 70 30 a moderate portfolio? ›
It's important to note that both the 60/40 and 70/30 asset allocations are considered moderately risky. But the exact amount of risk you are comfortable with will depend on your specific needs and goals.
What is considered a good portfolio return? ›
A good return on investment is generally considered to be around 7% per year, based on the average historic return of the S&P 500 index, adjusted for inflation. The average return of the U.S. stock market is around 10% per year, adjusted for inflation, dating back to the late 1920s.
Where is the safest place to put your retirement money? ›
The safest place to put your retirement funds is in low-risk investments and savings options with guaranteed growth. Low-risk investments and savings options include fixed annuities, savings accounts, CDs, treasury securities, and money market accounts. Of these, fixed annuities usually provide the best interest rates.
How much money do you need to retire with $100000 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.
What is the difference between 80 20 and 70 30 portfolio? ›
The main difference between the 70/30 and 80/20 asset allocation models is how much risk you're taking. With an 80/20 allocation, you're devoting a larger share of your money to stocks, which can mean greater exposure to stock market volatility.
What does 70 30 mean? ›
A 70/30 split usually is used when dealing with a business partnership or venture. A simple definition would be that out of every $100; one partner would get $70 and the other would get $30.
Is 70 30 risky? ›
It's important to note that both the 60/40 and 70/30 asset allocations are considered moderately risky. But the exact amount of risk you are comfortable with will depend on your specific needs and goals.
What should my asset allocation be at 30? ›
So a 30-year-old investor should hold 70% of their portfolio in stocks. This should change as the investor gets older. But with individuals living longer, investors may be better suited in changing that rule to 110 minus your age or even 120 minus your age.
