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SmartAsset: 60/40 vs. 70/30 Asset Allocation:

The right asset allocation is essential to your financial success. It’s a strategic mix of investments in your portfolio designed to help you achieve your financial goals. Weighing the differences between an allocation of 60% stocks and 40% bonds (60/40) versus 70% stocks and 30% bonds (70/30) can help you find the best option for your situation. Let’s compare the two allocations for your portfolio. A financial advisor could help you create a financial plan that suits your investment needs and goals.

What is Asset Allocation?

At first glance, asset allocation seems straightforward. After all, it’s simply how you allocate your assets in an investment portfolio. But asset allocation is an extremely important part of investing. For the purpose of allocating your investment assets, three groups of securities are considered: stocks (stocks), bonds (fixed income) and cash.

Stocks are small portions of companies purchased at a price determined by the market. You can buy shares in many of the biggest companies in the world, like Apple, Microsoft, and General Motors. You can also buy shares of small companies that have chosen to go public. Stock prices fluctuate throughout the day. When investing in stocks, the general idea is to sell the stock for a higher price than you bought it, creating a return on your investment. Although capable of producing capital appreciation, stocks are also a volatile asset, so the proportion of stocks you own depends on your risk profile.

Bonds are a certificate of debt that you buy. Companies, governments and municipalities sell bonds. Bonds repay with interest at a certain time, known as the maturity date. They generally have less potential than stocks, but are also less risky and offer an income stream.

Cash is just that: cold, ringing cash that you can access at any time, without having to do another financial maneuver. It experiences no capital appreciation and offers virtually no income. It can be stored in a traditional savings account or in a money market account.

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Comparison of 60/40 and 70/30 asset allocation

When considering the best asset allocation for your financial situation, you’ll need to consider a variety of factors, including current interest rates, inflation, and your specific risk tolerance. Let’s take a closer look at the 60/40 and 70/30 asset allocation strategies:

60/40 Asset Allocation

The 60/40 portfolio includes an asset allocation of 60% equities and 40% bonds. The objective of this strategy is to offset the risk associated with stocks by allocating a significant portion of your assets to low-risk bonds.

Financial experts claim that this combination of assets offers a relatively safe way to grow your assets. Conversely, investors could take advantage of higher returns by investing more in equities. But bonds help mitigate the risk associated with stock market volatility.

70/30 asset allocation

A 70/30 asset allocation increases your equity holdings to 70% of your portfolio and decreases your bond holdings to 30%.

In recent years, the 70/30 asset allocation has become more popular. But many investors still prefer a 60/40 portfolio based on lower risk tolerance.

Essentially, this portfolio takes on more risk in exchange for higher returns. As an individual investor, you will need to weigh the risks and rewards of your unique financial goals.

When to choose a 60/40 asset allocation

SmartAsset: 60/40 vs. 70/30 Asset Allocation:

SmartAsset: 60/40 vs. 70/30 Asset Allocation:

Investors with moderate risk tolerance or a short investment horizon could benefit the most from a 60/40 asset allocation.

For reference, US financial services firm Morningstar says large-cap stocks have returned an average of 10.2% per year between 1926 and 2017. And over the same period, long-term government bonds earned nearly half of the year (5.5%).

Although Morningstar data indicates that your portfolio could grow more over time with stocks, market volatility will also expose your investments to additional risks that would otherwise be offset by bond investments.

It may be wise to play it safe with your investment portfolio when you are approaching retirement or are already retired when your time horizon is much shorter and you may need your retirement assets to pay for fixed and variable costs. Although some financial experts have also recommended a more aggressive asset allocation when you have more secure sources of retirement income.

When should you choose a 70/30 asset allocation

Investors who have a higher risk tolerance or a longer investment schedule could benefit from increasing their allocation to a 70/30 strategy.

This could include investors who are still decades away from retirement and may be able to handle more risk than older investors. As noted earlier, since large-cap stocks have higher yields than bond investments, younger investors might have plenty of time to bolster their portfolios and recover from potential losses due to market volatility.

It is important to note that 60/40 and 70/30 asset allocations are considered moderately risky. But the exact amount of risk you’re comfortable with will depend on your specific needs and goals.

Conclusion

SmartAsset: 60/40 vs. 70/30 Asset Allocation:

SmartAsset: 60/40 vs. 70/30 Asset Allocation:

When choosing between a 60/40 and 70/30 asset allocation, you will need to decide what percentage of your portfolio will be invested in stocks. This will depend on the time horizon of your portfolio and your risk tolerance. Either way, you can adjust your bond allocation to minimize risk during periods of market volatility.

Investment tips for beginners

  • Work with an advisor. The right asset allocation can be difficult to determine. Finding a qualified financial advisor doesn’t have to be difficult. SmartAsset’s free tool connects you with up to three financial advisors who serve your area, and you can interview your matching advisors for free to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, start now.

  • Choose an asset profile. SmartAsset’s free asset allocation calculator will help you choose a profile to help align your portfolio allocation with your risk tolerance.

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