Example Asset Allocations

[WendyMay]

When it comes to asset allocation, the sky really is the limit. There's no end to the arrangements and strategies to take advantage of. From the simple 50% equities, 50% bonds split to the much more complex time horizon, bond variation, stock variation, large-cap, small-cap, developing market, developed market conglomeration, it's up to the individual investor to settle on what makes him or her feel best. We each have different risk/reward tolerances and it's certainly possible to come up with a mix of assets that will allow each one of us to sleep well at night while making a decent return.

If you haven't already done so, you might want to read a few posts that lead to this one. They are:

What's Portfolio Rebalancing?

What's Asset Allocation?

Pros & Cons of Portfolio Rebalancing

Most people don't really care about the theory and that's why I thought I'd write this post. To offer you real life allocations. Take a look at what I share down below to get a feel for what various percentages of real allocations look like. Then, share some comments on what you like about each and don't like about each. I'd love to get your opinion on all of this.

Now, just so you know, I'm only going to give some very basic asset allocations below. I'll add some ETF ticker symbols to each for good measure, but I won't get into much depth. In the comments and discussion that follows, we can dive deeper into the technical aspects of everything. Also, there are many different asset allocation strategies, such as age based, life-cycle funds, constant weight, tactical, insured, and dynamic. Discussion is welcome for each.

Example Asset Allocation

Stocks
Small-Cap Growth Stocks – 25% (VBK)
Large-Cap Value Stocks – 15% (VYM)
International Stocks – 10% (VEU)

Bonds
Government Bonds – 15% (VGLT)
High Yield Bonds – 25% (VWEHX)

Cash
Money Market – 10%

Please take these ETFs with a grain of salt. Do your own research when purchasing or researching investments. Also realize that you may not have to purchase separate small cap, large cap, growth, and value stock ETFs if an overall market ETF may serve you just as well. I like Vanguard's VOO because it covers the entire S&P 500. Many people like that ETF. Of course, if you'd like the lion's share of your equity holdings to be small cap stocks or something similar, then you'll need to keep the investments separate.

Here are three different common allocations based on investor type:

Aggressive Investor
Large-Cap Stocks - 20%
Mid-Cap Stocks - 20%
Small-Cap Stocks - 20%
International Stocks - 20%
Emerging Markets Stocks - 10%
Intermediate Bonds - 10%
Short-Term Bonds - 0%

Moderate Investor
Large-Cap Stocks - 20%
Mid-Cap Stocks - 20%
Small-Cap Stocks - 10%
International Stocks - 15%
Emerging Markets Stocks - 5%
Intermediate Bonds - 30%
Short-Term Bonds - 0%

Conservative Investor
Large-Cap Stocks - 25%
Mid-Cap Stocks - 10%
Small-Cap Stocks - 10%
International Stocks - 5%
Emerging Markets Stocks - 0%
Intermediate Bonds - 40%
Short-Term Bonds - 10%

Obviously, you'll need to research your own ETFs for those above examples, but that should point you in the right direction. If you aren't familiar with companies who offer ETFs, check out Vanguard. They're very inexpensive and I like them a lot.

Also, you might want to look at different sectors of the market to further diversify into. I like having a real estate ETF in my mix (VNQ), just because I love real estate. To learn more about that, check out this really great post by Lyn Alden.

And finally, please do comment below. Tell me what type of asset allocation mix you prefer and why.

 

[15Katey]

Do you know of any asset allocations that are broken down by sector? I have read a lot about adding real estate and gold. Real estate has got good returns and gold is going sky high right about now. I read that it's a good hedge against inflation as well as economic uncertainty.

 

[WendyMay]

I love your ideas about real estate and gold. What you described sounds like one of my portfolios. If my best friend asked me to lay out an asset allocation plan for her, this is what I'd tell her to invest in today:

Large-Cap Stock ETF: Companies with market cap larger than $10 billion. (VV - 10%)

Mid-Cap Stock ETF: Companies with market cap between $2 billion and $10 billion. (VO - 10%)

Small-Cap Stock ETF: Companies with market cap less than $2 billion. (VB - 10%)

International Stock ETF: Companies listed on foreign stock exchanges. (VEA - 5%)

Emerging Market Stock ETF: Companies from developing countries. (VWO - 5%)

Bond ETF: Well rated corporate and government bonds. (BND - 35%)

Money Market ETF: Short term debt such as Treasury Bills. (ICSH - 5%)

Real Estate Investment Trust (REIT) ETF: Shares in an investor pool of mortgages or properties. (VNQ - 5%)

Gold ETF: Shares of investments that hold gold as an underlying asset. (GLD - 5%)

This portfolio works well because both the bonds and the gold aren't correlated with the equities. This bodes well for the rebalancing portion of the strategy. Also, I would only suggest this portfolio to my friend if she had at least $100,000 to invest. If she had any less, I'd say to simply invest the top three asset classes in the S&P 500 (VOO) and combine both the bonds and money market into just overall bonds (BND).

I'm open to tweaks or suggestions on this allocation, so if anyone has anything they'd like to share, please do.

 

[WendyMay]

By the way, I found this excellent article that explains what asset classes are and gives examples of each. It's well worth the read:

https://www.jagoinvestor.com/2016/06/asset-classes.html

Here's a graphic from their site: