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The Essential Guide to Asset Allocation by Age and Risk Tolerance



In our previous blog posts, we explored key topics essential for securing a better financial future through investment. We discussed the fundamentals of investing, the advantages of passive investing, and the growing popularity of passive investing in recent years. We also covered strategies for managing sudden market downturns and considerations for long-term investors during current market highs. We also explained the concept of rebalancing and explain why it is helpful to maintain a balanced portfolio.


Today we are going to cover another fundamental topic in investing: asset allocation by age and risk tolerance.

 

What?

Asset allocation refers to how you divide your investments among different asset classes, such as stocks, bonds, and cash. This division is crucial because it helps balance risk and reward according to your financial goals and risk tolerance. Generally, younger investors are advised to invest more heavily in stocks for growth, while older investors should shift towards bonds and cash to preserve capital.

 

So What?

There is no right or wrong answer to asset allocation. The guidance below is generally accepted but can be too conservative or too risky based on an individual's financial goals and risk appetite. The key to effective asset allocation is understanding how your age and risk tolerance impact your investment strategy:

 

In Your 20s and 30s:

  • High Risk Appetite: Focus on growth by allocating 80-90% of your portfolio to stocks and the remaining to bonds or cash. This approach leverages the long investment horizon to recover from market downturns.

  • Moderate Risk Appetite: Consider a mix of 70% stocks, 20% bonds, and 10% cash. This still offers growth potential but with added stability.

 

In Your 40s and 50s:

  • High Risk Appetite: Maintain a growth orientation but start to incorporate more bonds. A 70% stock and 30% bond allocation is common.

  • Moderate Risk Appetite: Shift towards a balanced approach with 60% stocks, 30% bonds, and 10% cash. This helps manage volatility while still aiming for growth.

 

In Your 60s and Beyond:

  • High Risk Appetite: Focus more on preserving capital. A 50% stocks and 50% bonds allocation can be considered.

  • Moderate Risk Appetite: Prioritize stability with 40% stocks, 40% bonds, and 20% cash. This allocation aims to protect against market downturns while providing some growth and income.

 

Now What?

Here are steps to help you implement the right asset allocation strategy:

  • Assess Your Risk Tolerance: Use online risk tolerance questionnaires or consult a financial advisor to understand your risk comfort level.

  • Define Your Financial Goals: Determine whether your primary objectives are growth, generating income, seeking value, or preserving capital. Your goals will influence how you allocate your assets.

  • Choose Your Investment Mix: Based on your age, risk tolerance and financial goals, select an appropriate mix of stocks, bonds, and cash (CDs and high yield savings). You can use ETFs and mutual funds to achieve diversification.

  • Regularly Rebalance Your Portfolio: As the market changes, your portfolio's allocation may drift from your target. Rebalancing annually or semi-annually ensures it stays aligned with your risk profile and goals.

 

Concluding Remarks

Remember, asset allocation is not a one-size-fits-all strategy. It requires regular review and adjustments to match your age, risk tolerance,  evolving financial goals, and market conditions. By understanding the principles of asset allocation and applying them thoughtfully, you can build a portfolio that helps you achieve your long-term financial objectives. Stay informed, stay disciplined, and don't hesitate to seek professional advice when needed to ensure your investment strategy remains aligned with your personal financial journey.

 

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