April 19, 2015

Balanced Asset Allocation Model Portfolio

Balanced Asset Allocation Model PortfolioA balanced asset allocation model portfolio is one designed to generate a steady combination of growth, income, and capital preservation.  The intention is to create a combination of asset classes that results in lower overall volatility so the investor doesn’t need to worry about wild market fluctuations because the holdings in their account mitigate each other to some degree.

Sample Balanced Asset Allocation Model Portfolio

A typical balanced asset allocation model portfolio may look something like this:

  • 10% international large capitalization blue chip stocks
  • 10% domestic large capitalization blue chip stocks
  • 10% midcap stocks
  • 10% small cap stocks
  • 10% cash reserves
  • 20% real estate
  • 10% gold and silver
  • 20% investment grade corporate and municipal bonds

A portfolio structured in such a way should generate dividend and interest income of at least 3% to 4% each, which would be reinvested.  The asset classes would work to stabilize the overall value of the portfolio.  If stocks fell 50%, it’s likely that gold and silver would rise in value, offsetting some of this loss.  At the same time, the real estate and bond components would be generating income that could be used to buy more undervalued stock as part of a disciplined rebalancing system.

Who Is Likely to Invest with a Balanced Asset Allocation Portfolio?

The investors most likely to benefit from a balanced asset allocation portfolio model are those who want to 1.) mitigate market volatility so that they experience far lower overall fluctuations in their net worth than the average investor, giving them greater peace of mind.  It’s a virtual certainty that a balanced portfolio wouldn’t experience a total loss, especially if the individual asset classes were diversified.  Another potential balanced investor is a wealthy retiree that doesn’t need to maximize the current income he or she receives, allowing them to focus on  a combination of long-term growth and current income, unlike the passive income asset allocation model portfolio, which is designed to generate the maximum sustainable cash yield even if it means lower long-term growth.

  • Nammijammi

    wait, you wrote “wealthy retiree” and long-term growth in the same sentence. Aren’t retiree too old to invest in long-term growth; too risky?

    • Joshua Kennon

      My personal belief is that asset class allocation decisions are more dependent upon risk profile and time frame than they are on age. If you had $25 million, it would make no sense for you to have 100% of your wealth in bonds. You should own a considerable amount of real estate and common stocks to beat inflation and earn a real rate of return since most of your money isn’t going to be spent and represents excess over your living requirements. If everything fell by half, it isn’t going to affect your day-to-day experience (at least if you’ve structured your life correctly).

      The idea that only young people should own stocks or only old people should own bonds is foolish, in my idea. I think the most rational approach is the one laid out by author Moshe A. Milevsky in Are You a Stock or a Bond?: Create Your Own Pension Plan for a Secure Financial Future.