Skip to main content
Financial Fundamentals

How to Choose the Right Portfolio Allocation Model

β€” Alexandra Ardelean

Hey everyone, Marco here from Whiteboard Finance. Today we're diving into the world of portfolio allocation models. This is a topic I've touched on before, but it's so important that it's always worth revisiting. Understanding how to allocate your portfolio based on your goals and risk tolerance is key to successful investing.

So, let's get into it.

Vanguard conducted a study on allocation models utilizing specific indices. The returns of the US stock market are based on the Standard and Poor's 90 from 1926 to 1957 and then the S&P 500 thereafter. The bond market returns are derived from the S&P High Grade Corporate Index from 1926 to 1968, followed by the Solomon High Grade Index from 1969 to 1972, and finally, the Barclays US Long Credit AA Index. As for the US short-term reserves returns, they are based on the Botson US 30-Day Treasury Bill Index from 1926 to 1977 and then the FTSE 3-Month US Treasury Bill Index.

Portfolio allocation models are guidelines for goals-based investment strategies. There is no right or wrong model; it depends on individual goals and risk tolerance. Different life stages and financial goals influence investment strategies.

An income portfolio is for lower-risk, older individuals with a short- to mid-range investment time horizon.

  • A portfolio with 100% bonds has an average annual return of about 6.3% from 1926 to 2021.

  • A portfolio with a split of about 20% stocks and 80% bonds has an average annual return of about 7.5%, with its best year at about +40.7% in one year, its worst year at about -10.1%, over the same period.

  • A portfolio with a split of about 30% stocks and 70% bonds has an average annual return of about 8.1%, with the best year at around +38.3% and the worst year at about -14.2%, over the same period.

A balanced portfolio typically consists of a 60-40 split between stocks and bonds, aiming to reduce volatility.

  • A portfolio with a split of about 40% stocks and 60% bonds has an average annual return of about 8.7%, with the best year at around +35.9% and the worst year at about -18.4%, over the same period.

  • A portfolio with a split of about 50% stocks and 50% bonds has an average annual return of about 9.3%, with the best year at around +33.5% and the worst year at about -22.5%, over the same period.

A traditional financial advisor might recommend a balanced portfolio using the "120 rule" (subtracting age from 120 to determine equity allocation).

  • A portfolio with a traditional balanced allocation (60% stocks, 40% bonds) has historically returned an average annual return of about 9.9%, with its best year at around +36.7% in 1933 and its worst year at around -26.6% in 1931, over the same period.

A growth portfolio consists mostly of stocks for long-term appreciation, suitable for those with high risk tolerance and long-term investment horizons.

  • A portfolio with a split of about 70% stocks and 30% bonds has an average annual return of about 10.5%, with the best year at around +41.1% and the worst year at about -30%.

  • A portfolio with a split of about 80% stocks and 20% bonds has an average annual return of about 11.1%, with the best year at around +45.4% and the worst year at about -34.9%, over the same period.

A high-risk, high-reward strategy is investing in a portfolio consisting entirely (100%) of stocks, which historically has returned an average annual return of about 12.3%, with its best year at around +54.2% in one year and its worst year at about -43.1%, over the same period.

PolicyGenius is today's sponsor for life insurance plans beyond workplace coverage, offering peace of mind for family financial security in case something happens to you outside work.

PolicyGenius offers modernized life insurance comparison technology for easy quotes from top insurers starting at $25 per month for $1 million coverage without medical exams in some cases.

PolicyGenius' licensed agents provide unbiased guidance without incentives from insurance companies, ensuring privacy and no added fees for customers' personal details protection.

Whiteboard Finance University is coming soon within a month or so! It will offer financial education membership including live streams with me, access to real estate, personal finance, and stock market professors for a monthly fee.

In conclusion, investors are compensated for risk in their portfolios based on historical performance data.

If I were given $1 million to invest for fifteen years, I would choose a portfolio that includes a diverse range of assets to maximize the potential for growth and minimize risk. Here's how I would allocate the funds: 1. Stocks (60%): I would allocate the majority of the portfolio to stocks, focusing on a mix of large-cap, mid-cap, and small-cap companies across various sectors. This provides exposure to the potential for high returns over the long term. I would include both domestic and international stocks to diversify the portfolio geographically. 2. Bonds (20%): Bonds provide stability and income to the portfolio. I would invest

Have a prosperous day!