Porfolio Allocation Ratios

Choosing a good portfolio allocation ratio is both an art and a science.
There are many to choose from, each of which has its own merits.
Here a few to choose from:

The Bucket System This is a system where you allocate your savings into three buckets: a security bucket for your “safe” money, a growth bucket for your “play” money, and a dream bucket for a specific financial goal. The actual ratios you use vary depending upon your own objectives. Keep reading for some ideas on how to determine the percentages you may want to use.

The 80/20 Rule – Depending on your timeline, allocate 70-80% of your portfolio to safe compounding investments, such as CDs, Treasuries, and conservative-mix mutual funds, etc. Allocate 20-30% to major bull markets. This would include stocks or stock funds with solid growth potential.

The 50/40/10 Pyramid – recommended by Investment Advisor Keith Fitzgerald. 50% of your overall portfolio is committed to safety and balance, such as balanced mutual funds and a smattering of bond funds and cash. 40% is invested in solid global growth and income stocks and funds. 10% of the portfolio is available for more speculative stocks.

The Tiered Approach – recommended by Larry Burkett. While this approach does not provide a handy-dandy plug-n-play ratio, it does offer a different look at how to subdivide your portfolio. The tiers for this approach are as follows:

Tier 1: Secure Income – selected to generate cash with very little risk. Examples: T-bills, CDs, savings and money market accounts.

Tier 2: Long-Term – selected for stability of earnings for a minimum of one year. Examples: municipal bonds, mortgages, corporate bonds, annuities, solid dividend-paying stocks, money funds.

Tier 3: Growth – selected for long-term appreciation. Examples: undeveloped land, rentals, mutual funds.

Tier 4: Speculative – includes more speculative growth investments with short-term appreciation. Examples: mutual funds, stocks, precious metals.

Tier 5: High Risk – volatile investments with maximum growth potential. Examples: high-flying stocks, venture-capital investments, limited partnerships, individual commodities, collectibles, and precious gems, where the rate of return can be extraordinary, but the risk of loss is just as great.

As with the Bucket System, this tier system requires careful thought about your allocations, taking into account your time horizon, your stomach for risk, and how much you can or cannot afford to lose and still be on track. Older investors and those who cannot afford to lose much should stick with the first 2-3 tiers. Younger investors and/or those with more money to “play” with can invest across all five tiers if they choose.

If I used this approach, I would do 30% T1 / 25% T2 / 20% T3 / 15% T4 / 10% T5. This is easy to remember, and fits into the more general 70-80 % / 20-30% rules-of-thumb. (Your Emergency Savings could make up the bulk of Tier 1.)

My Income-Oriented Strategy:

• 50% Safety and Balance

• 30% Income Funds

• 20% Growth

This investment strategy can be conservative or aggressive, depending on the basket of income funds chosen. A mix of high-yielding funds and solid lower-yielding funds could provide the best of both worlds.


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