When adopting a long-term viewpoint, you can use something called strategic asset allocation. This investment strategy determines what percentage of your investments should be in stocks vs. bonds. With this approach, you choose your investment mix based on historical measures of the rates of return and levels of volatility of different asset classes. (“Volatility” is risk as measured by short-term ups and downs.) For example, in the past, stocks have had a higher rate of return than bonds over the long term. But, stocks have had more volatility in the short term. The four allocation samples below are based on a strategic approach. This means that you are looking at the outcome over 15 years or more.
Ultra Aggressive
If your goal is to see returns of 9% or more, you should allocate 100% of your portfolio to stocks. You must expect that at some point with this approach you will see a quarter where your holdings lose as much as 30%. You may even see an entire year where your stocks are down as much as 60%. That means for every $10,000 invested, the value could drop to $4,000. Over many, many years, the down years (which happens about 30% of the time) should be offset by the positive years (which happens about 68% of the time).
Moderately Aggressive
If you want to target a long-term rate of return of 8% or more, move 80% of your portfolio to stocks and 20% to cash and bonds. With this approach, expect that at some point you could have a single quarter where your portfolio drops 20% in value. You may even have an entire year where it drops by as much as 40%. But the idea is that it will recover (and then some) over the long term. It is best to rebalance this mix about once a year.
Moderate Growth
If you want to target a long-term rate of return of 7% or more, keep 60% of your portfolio in stocks and 40% in cash and bonds. With this mix, a single quarter or year could see a 20% drop in value. It is best to rebalance about once a year.
Conservative
If you want to preserve your capital rather than earn higher returns, then invest no more than 50% in stocks. You may still have volatility with this approach and could see a quarter or a year where your portfolio falls by 10%. If you want to avoid any risk, consider sticking with safer bets like money markets, CDs, and bonds.
Retirement Considerations
The models above provide a guide for you if you haven’t retired yet. They aim to give high returns while minimizing risk. That may not suit you when you shift to retirement. Then, you will need to take regular withdrawals from your savings and investments. At that phase of life, your goal changes from growing returns to securing steady income. A portfolio built to boost returns may not be as effective at generating consistent income due to its volatility. If you are near retirement, check out other approaches. For example, you might add up the amount you need to withdraw over the next five to 10 years. Then, you might decide which portion of your holdings to put in bonds, with the rest held in stocks. With that strategy, your needs are safely invested but you allow some room for growth. However, the part invested in stocks is still subject to volatility, which you should watch carefully.
