Asset Allocation

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What is Asset Allocation

Asset allocation is an investment strategy that aims to balance risk and reward by apportioning a portfolio's assets according to an individual's goals, risk toleranceand investment horizon. The three main asset classes - equities, fixed-income, and cash and equivalents - have different levels of risk and return, so each will behave differently over time.

Age-based Asset Allocation

In general, stocks are recommended for holding periods of five years or longer. Cash and money market accounts are appropriate for objectives less than a year away. Bonds fall somewhere in between. In the past, financial advisors have recommended subtracting an investor's age from 100 to determine how much should be invested in stocks. For example, a 40-year old would be 60% invested in stocks. Variations of the rule recommend subtracting age from 110 or 120 given that the average life expectancy continues to grow. As individuals approach retirement age, portfolios should generally move to a more conservative asset allocation so as to help protect assets that have already been accumulated.

The Vanguard Target Retirement 2030 Fund would be an example of a target-date fund. As of 2018, the fund has a 12-year time horizon until the shareholder expects to reach retirement. As of January 31, 2018, the fund has an allocation of 71% stocks and 29% bonds. Up until 2030, the fund will gradually shift to a more conservative 50/50 mix, reflecting the individual's need for more capital preservation and less risk. In following years, the fund moves to 67% bonds and 33% stocks.