Asset allocation is and should be one of the first decisions made in planning an overall investment portfolio. Some investors do their asset allocation accidentally, by only investing in one or two asset classes they know or are sold, or as the result of buying different individual investments one by one with no overall plan. A planned asset allocation, on the other hand, is like a planned diet that ensures the portfolio has the right balance of financial nutrients without too much concentration or the wrong kind of risk.
The first goal of asset allocation is to divide invested assets into 2-5 major categories of investments that are not too related to each other, so that ideally one goes up when another goes down. Two of the best known asset classes for asset allocation are simply “stocks” and “bonds”. One of the main reasons I find it important to own bonds, even at low yields, is that they tend to move in the opposite direction of stocks, so a combination of stocks and bonds has a higher return for the same amount of risk of an all-stock or all-bond portfolio.
Below is a chart comparing the growth of $100,000 from Dec 2007 through the 2008-2009 crash over 10 years to Dec 2017 of three different asset allocations:
- Conservative: 80% bonds / 20% stocks
- Moderate: 50% bonds / 50% stocks
- Aggressive: the Moderate Portfolio levered up 1.5x
In an earlier post, I discuss what rates of return to use in retirement calculators.
Here are the average annual rates of return and two risk metrics of each.
| GFM Conservative | GFM Moderate | GFM Aggressive | S&P 500 ETF | |
| Average Annual Return | 4.7% | 6.9% | 9.4% | 8.3% |
| Standard Deviation | 6.1% | 9.7% | 14.5% | 15.1% |
| Worst Month | -7.1% | -11.1% | -17.1% | -16.8% |
Is your portfolio balanced along this spectrum? Contact us through the form below if you’d like to discuss asset allocation.