Portfolio Asset Allocation Models by Age

Asset allocation is an investment strategy where you divide your investment portfolio into different asset classes – such as stocks, bonds, cash and real estate – based on your risk appetite and age. Asset allocation helps you balance risk and reward by spreading your investment across a range of investment instruments. With each asset class having its own risk and return profile, your overall risk is curtailed, and your returns are enhanced.  

Your asset allocation should change and evolve per your changing financial needs, age, and other factors. While there is no one-size-fits-all approach to asset allocation, you can benefit from understanding the key principles of asset allocation by age and risk tolerance, and the role of asset allocation in achieving your long-term investment goals. You may also consider consulting with a professional financial advisor who can tweak your portfolio and allocate assets as per your financial needs, your age, and other factors.

Keep reading to learn more about asset allocation and the ideal asset allocation mix to consider for your portfolio, based on your age. 

Asset allocation explained

1. Types of asset classes:

Generally, there are four types of asset classes – stocks, bonds, cash, and real estate. However, there can be other classes like cryptocurrencies, alternative investments like hedge funds, commodities, gold, and more. Stocks are considered high risk assets as they are volatile and more susceptible to price oscillation due to market fluctuations and downturns. On the other hand, bonds are a type of debt instrument issued by companies, municipalities, and governments. They represent low risk and low returns. Further, cash is a safe-haven asset and is used as an emergency fund in the case of unexpected financial needs. Lastly, real estate is a tangible asset that can be used to produce income. Its value also appreciates and can offer long-term returns. 

2. Common asset strategies:

There are several asset allocation strategies, and the one that works best for you depends on your investment goals, risk tolerance, and time horizon. Here are some of the most popular asset allocation strategies:

a. Strategic asset allocation: This strategy involves investing in a fixed percentage of assets in each asset class based on your goals and risk tolerance. The allocation is reviewed periodically and rebalanced to maintain the desired percentage.

b. Dynamic asset allocation: This strategy involves adjusting the allocation of assets based on economic and market conditions. The portfolio is rebalanced periodically to reflect the changes in the market.

3. Benefits of asset allocation:

a. Lowers risk and diversifies the portfolio: Diversifying your investments across different asset classes reduces investment risk. Different asset classes tend to perform differently under different market conditions. Hence, when you invest in a variety of asset classes, you get to spread your risk and reduce the impact of market volatility on your portfolio. 

b. Maximizes returns and speeds up the process of wealth creation: Asset allocation can boost your returns by helping you identify a suitable mix of assets appropriate for your distinct needs and goals. It helps you take advantage of the potential of several asset classes at different times. This ultimately helps in achieving better overall returns. It also speeds up the process of capital appreciation. The sooner you reach your goals, the more relaxed you can be and the better life you can have.

c. Offers tax diversification: While most people know and understand that asset allocation helps in risk reduction and return maximization, not many realize that it also offers tax benefits. Tax diversification is an integral yet ignored component of financial planning. Asset allocation can help you manage your tax liabilities by investing in a combination of tax-advantaged accounts, such as a 401(k) or an Individual Retirement Account (IRA). It reduces your tax burden and maximizes your after-tax returns. 

d. Supports long-term planning: Asset allocation is a critical component of long-term financial planning. By diversifying their investments across different asset classes, you can create a portfolio that is well-suited to your risk tolerance, investment goals, and time horizon. This can help you achieve your financial objectives over the long term.

e. Helps in periodic portfolio rebalancing: Rebalancing refers to adjusting your investment portfolio from time to time to maintain the desired asset allocation. For example, if your stock investments have performed well and gone up, the ratio of your stocks to bonds may change. In this case, you may need to sell some stocks and reinvest the money in bonds to get back to your desired asset allocation so that your portfolio remains aligned with your investment goals. 


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What should my investment portfolio look like based on my age?

The ideal mix of investments in your investment portfolio can depend on a number of factors, the primary one being your age. Asset allocation by age is a tried and tested strategy to help ensure your risk, and returns are properly aligned with your age-specific goals. 

If you want to know what the ideal portfolio mix is based on your age, you may refer to the following guide: 

1. If you are in your 20s 

Your 20s are usually when you start your career. At this time, you may likely not have too many financial responsibilities. You would also have a long investment term ahead of you, making it an ideal time to keep a high-risk appetite and invest more in equity. This should be the time to focus on capital appreciation and invest heavily in stocks, equity mutual funds, Exchange-Traded Funds (ETFs), and others. You can invest 90% of your investment budget in equity and the remaining 10% in debt and cash. This can help you chase your long-term goals from a young age and, at the same time, stay prepared for an unexpected eventuality.  

2. If you are in your 30s

Your 30s can be more or less similar to your 20s in terms of your risk tolerance, especially if you are unmarried and do not have kids. You can afford to take on more risk and continue with the 90/10 asset allocation model, with 90% of your investments focusing on equity and the remaining 10% on fixed-income investments and cash. This model can also suit married couples where both partners are earning, and even parents, as your investment horizon continues to be long with at least 30 years left for retirement. 

3. If you are in your 40s 

In your 40s, your risk appetite may drop a little as your investment horizon will be shorter. You would have 20-odd years left before you retire. This can be a good time to shift some of your investment capital to fixed-income securities and cash. You can focus more on debt instruments, like bonds, money market accounts, debt mutual funds, etc. There is not a vast difference between an 80/20 vs. a 90/10 portfolio. However, the former asset allocation model can be a stepping stone to adjusting your investment portfolio according to your increasing age. 

4. If you are in your 50s

If you are considering retiring in your 50s, you can still have 10 to 20 years left to accumulate wealth. Your risk appetite considerably drops in your 50s, but you also have the option to make the most of catch-up contributions offered by tax-advantaged retirement accounts like the 401k and the IRA. This allows room for equity investments, and you can maintain anywhere between 65% and 85% in equity and equity-related securities. The remaining 15% to 35% can be invested in debt instruments. You can decide the precise allocation based on your unique needs, financial goals, investment budget, and income. A lot of people also choose the 70-30 portfolio at this age, with 70% allocation in equity and 30% in debt and cash.

5. If you are in your 60s 

If you plan to work through your 60s, you would have another 10-odd years to plan and prepare for retirement. However, if you plan to retire soon, you may have to adjust your investment portfolio and focus more on capital preservation rather than appreciation. Hence, you can aim to invest approximately 45% to 65% of your investment capital in equities, 30% to 50% in debt or fixed-income investments, and the remaining 0% to 10% in short-term investments to meet any immediate financial needs. A number of factors can impact your decision, such as your retirement age, your desire to work, your choice between full-time and part-time work, health concerns, etc. You can consult a financial advisor to discuss the benefits and features of all these asset allocation models by age and make a choice that aligns with your requirements.

6. If you are in your 70s and above

Your risk appetite would likely be the lowest during these years compared to any stage in your life. Therefore, it is advised to limit your equity exposure. As you age, your investment horizon shrinks. This means the chances of recouping from short-term equity volatility are low, and you may not have enough time to turn your losses (if incurred) into profits. However, you would still have to account for several expenses, such as long-term care, health expenses, travel, and more. Hence, you can aim to invest 30% to 50% in equities, 40% to 60% in debt, and 0% to 20% in short-term investments. 

Factors to keep in mind when selecting the right asset allocation based on your age

It is important to note that the asset allocation models by age shared above are general guides and may not suit everyone. The risk appetite is normally assumed based on the investor’s age. However, you may not always have the same risk tolerance as commonly presumed. Loans, credit card debt, job losses, health concerns, inflation, financially dependent family members, and market conditions may influence your asset allocation strategy at different points in your life.

Therefore, it may always be advised to look at your unique situation and make a decision only after careful assessment and evaluation. You can also consider hiring a financial advisor to understand the right mix of investments for your needs.

To conclude

Asset allocation is a critical investment strategy that every investor should consider. Investing in various asset classes can reduce your portfolio’s exposure to market fluctuations and potentially achieve more stable long-term returns. There are several asset allocation strategies and personal factors to consider before choosing the one that works best for your needs. You can also leverage the professional expertise of a financial advisor to make the right decisions.

Use the free advisor match service to get matched with 1-3 financial advisors who can help you draft the ideal asset allocation strategy for your age and financial goals. All you need to do is answer a few simple questions on your financial needs, and the match tool can help connect you with advisors that are best suited to help you reach your financial goals and requirements.

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