Investment portfolios aren’t just put together from bits and pieces of income-producing assets. Depending on an investor’s goals or objectives, these portfolios are based on asset allocations. Asset allocation describes the process an investor uses to divide capital among different asset classes such as stocks, bonds, and alternative assets. Asset allocation can be useful in diversifying risk and exposure to various investments.
There are many types of asset allocations. The 60/40 allocation tends to be used the most, with 60% of a portfolio directed to stock holdings and 40% of the portfolio containing bonds. Then there is the 75/25 asset allocation. This strategy means the investor puts 75% of their capital into stocks and 25% into bonds.
More in Retirement?
During the 1980s, investor Peter L. Bernstein suggested a 75/25 split between equities and bonds, versus the 60/40 allocation model. His reasoning? While equities can return less than bonds, they tend to outperform when bonds lose money. Additionally, equities would keep pace with bonds about a third of the time, he said.
Moving to 2020, Jeremy Siegel eschewed the traditional 60/40 allocation model. Siegel, who is a professor of finance at The University of Pennsylvania’s Wharton School, as well as a senior investment strategy advisor at WisdomTree, stated that a 60/40 allocation wouldn’t provide enough income in retirement, given the (at the time) low interest rates on bonds and (again, at the time) higher returns on stocks.
Using a higher equity percentage and lower fixed-interest model would “be the best way for those approaching retirement to establish their assets to get enough income and gains,” so they would have enough to finance their retirement, he told CNBC.
According to Siegel, the Siegel-WisdomTree Longevity Model, which supports the 75/25 allocation, can be useful for investors who want to balance income with longevity risk. Investors following this model are likely comfortable with a little extra investment risk for the potential of more income in retirement.
Then and Now
Siegel’s thoughts about the 75/25 asset allocation were announced during a time of low interest rates and high stock valuation and returns. Fast-forwarding a couple of years, things have changed. Interest rates continue increasing, while the value of equities has declined. Furthermore, volatility seems to be the main path of today’s investments.
How well does the 75/25 strategy work in today’s specific environment? Ben Carlson with Ritholtz Wealth Management reported that between 1950-1981, returns from a 75/25 asset allocation were 9.7% compared to the 8.1% returns from a 60/40 asset allocation. But volatility and risk were higher with the 75/25 allocation, clocking in at 13.5% (versus the 10.8% from a 60/40 allocation).
Yet the 75/25 asset allocation portfolio outperformed because, as Carlson put it (in the words of Peter Bernstein), “cash outperformed bonds.” It’s also important to remember that the period included the 1970s, which consisted of high rates of inflation and stagflation.
Is the 75/25 Allocation a Good Strategy?
Before any investor jumps into rebalancing their portfolio to reflect a 75/25 asset allocation strategy, Carlson acknowledged that the “75/25 portfolio is not a perfect solution. But the perfect solution doesn’t exist right now.” Investors looking for higher returns in the current high-interest, low-return environment will have to live with higher volatility and more risk.
As such, the 75/25 asset allocation method isn’t necessarily a good or bad strategy. It’s based on an investor’s appetite for risk and what returns they’re looking for. For any kind of portfolio rebalancing or strategy shift, it’s always a good idea for that investor to consult with a financial planner.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice, meeting the particular investment needs of any investor.
Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.
Neither asset allocation nor diversification guarantee a profit or protect against a loss in a declining market. They are methods used to help manage risk.
Rebalancing can entail transaction costs and tax consequences that should be considered when determining a rebalancing strategy.
FAQs
Then there is the 75/25 asset allocation. This strategy means the investor puts 75% of their capital into stocks and 25% into bonds.
What is meant by the asset allocation 75 25? ›
Description. A unit investment trust which seeks the potential for above-average total return by investing approximately 75% of its assets in common stocks which are selected by applying a disciplined investment strategy and 25% of its assets in exchange-traded funds which invest in fixed-income securities.
What is the average return on a 75/25 portfolio? ›
Returns By Period
| Year-To-Date | 10 years (annualized) |
|---|
| 75/25 portfolio | 6.38% | 9.79% |
| Portfolio components: |
| VHT Vanguard Health Care ETF | 6.78% | 10.96% |
| VDC Vanguard Consumer Staples ETF | 9.09% | 8.80% |
18 more rowsFAQ. The 75/25 saving method is a simple budgeting rule. It means you use 75% of your income for your day-to-day bills and needs, and put 25% into savings or investments. This way, you're taking care of your current expenses while also building a nest egg for your future.
What should the asset allocation be for a 75 year old? ›
Age 70 – 75: 40% to 50% of your portfolio, with fewer individual stocks and more funds to mitigate some risk. Age 75+: 30% to 40% of your portfolio, with as few individual stocks as possible and generally closer to 30% for most investors.
Is 70 30 a good asset allocation? ›
The 30% exposure to bonds buffers the risk of 70% equity exposure to some extent, besides providing stable returns. While asset allocation is generally governed by various factors including demographics and economics, the 70/30 rule may serve as a good starting point for most investors.
What is a reasonable asset allocation? ›
A good asset allocation varies by individual and can depend on various factors, including age, financial targets, and appetite for risk. Historically, an asset allocation of 60% stocks and 40% bonds was considered optimal.
What is the best mix of stocks and bonds for retirement? ›
60/40 Mix of Stocks and Bonds
Retirees can also get an income advantage with smart portfolio management. That means finding the right balance of stocks and bonds to meet an income goal. You can start that process by building a "60/40" investment portfolio.
What is the best retirement portfolio for a 60 year old? ›
At age 60–69, consider a moderate portfolio (60% stock, 35% bonds, 5% cash/cash investments); 70–79, moderately conservative (40% stock, 50% bonds, 10% cash/cash investments); 80 and above, conservative (20% stock, 50% bonds, 30% cash/cash investments).
What is the best allocation for a mutual fund portfolio? ›
If you are a moderate-risk investor, it's best to start with a 60-30-10 or 70-20-10 allocation. Those of you who have a 60-40 allocation can also add a touch of gold to their portfolios for better diversification. If you are conservative, then 50-40-10 or 50-30-20 is a good way to start off on your investment journey.
There are many types of asset allocations. The 60/40 allocation tends to be used the most, with 60% of a portfolio directed to stock holdings and 40% of the portfolio containing bonds. Then there is the 75/25 asset allocation. This strategy means the investor puts 75% of their capital into stocks and 25% into bonds.
What is the best IRA portfolio allocation? ›
There are rules of thumb to guide you, the most notable being to subtract your age from 100 (or, to sway more toward risk, 110). The resulting number is the percentage of your portfolio that should be allocated toward stocks: Under this rule, if you're 30, you'd direct 70% to 80% that way.
What is the 75 25 rule? ›
The rule known to many as the “75/25” rule is really a federal law that addresses unlicensed seaman that may be employed on board certain vessels. The law is 46 USC 8103 and there are two provisions in this law that we routinely see.
How much do I need to invest to make $1000 a month? ›
A stock portfolio focused on dividends can generate $1,000 per month or more in perpetual passive income, Mircea Iosif wrote on Medium. “For example, at a 4% dividend yield, you would need a portfolio worth $300,000.
At what age should you get out of the stock market if you? ›
There are no set ages to get into or to get out of the stock market. While older clients may want to reduce their investing risk as they age, this doesn't necessarily mean they should be totally out of the stock market.
What is the golden rule of asset allocation? ›
The “100-minus-age” rule is a widely recognized rule of thumb in personal finance used to establish asset allocation, the practice of distributing your investment portfolio among various asset classes such as stocks, bonds, and cash.
What is the most successful asset allocation? ›
Finding the right mix for your portfolio. One of the first things you learn as a new investor is to seek the best portfolio mix. Many financial advisors recommend a 60/40 asset allocation between stocks and fixed income to take advantage of growth while keeping up your defenses.
What does an aggressive retirement portfolio look like? ›
Understanding Aggressive Investment Strategy
For example, Portfolio A which has an asset allocation of 75% equities, 15% fixed income, and 10% commodities would be considered quite aggressive, since 85% of the portfolio is weighted to equities and commodities.
What does Warren Buffett recommend now? ›
Instead, he has regularly advised investors to periodically purchase shares of an index fund that tracks the S&P 500 (SNPINDEX: ^GSPC). That strategy provides diversified exposure to hundreds of American businesses that are collectively "bound to do well" over time, according to Buffett.
What is Warren Buffett's investment strategy? ›
Warren Buffett's investment strategy has remained relatively consistent over the decades, centered around the principle of value investing. This approach involves finding undervalued companies with strong potential for growth and investing in them for the long term.
Buffett said he revises his will every three years, and he still advises his wife to allocate 10% of her inheritance to short-term government bonds and 90% to a low-cost S&P 500 index fund.
What is a good asset allocation for a 75 year old? ›
If you're 75, for example, then you should have 25% in stocks. But now that Americans are living longer, that formula has changed to 110 or 120 minus your age — meaning that if you're 75, you should have 35% to 45% of your portfolio in stocks.
Should a 70 year old be in the stock market? ›
Indeed, a good mix of equities (yes, even at age 70), bonds and cash can help you achieve long-term success, pros say. One rough rule of thumb is that the percentage of your money invested in stocks should equal 110 minus your age, which in your case would be 40%. The rest should be in bonds and cash.
What is the 5 asset rule? ›
The 5% rule says as an investor, you should not invest more than 5% of your total portfolio in any one option alone. This simple technique will ensure you have a balanced portfolio.
What is the Graham 75-25 rule? ›
Graham adds investing on margin and chasing hot stocks to that list of speculative endeavors. Graham advises an allocation of no more than 75% and no less than 25% of your money in high-grade bonds and common stocks, with the simplest choice being 50-50.
What is 80 20 asset allocation? ›
This investment strategy seeks total return through exposure to a diversified portfolio of primarily equity, and to a lesser extent, Fixed Income asset classes with a target allocation of 80% equities and 20% Fixed Income. Target allocations can vary +/-5%.
What do you mean by asset allocation? ›
Asset allocation refers to distributing or allocating your money across multiple asset classes, such as equity, fixed income, debt, cash, and others. The primary purpose of asset allocation is to reduce the risk associated with your investment.
