Home Categories Investment Guidelines to an effective asset allocation

Guidelines to an effective asset allocation

Guidelines to an effective asset allocation
In which bucket is your money?

An Asset Allocation is typically based on 4 types of basics assets:

Stocks, Real-Estate, Bonds and Cash and a target allocation very much depends on the individual, his/her goals and time horizon as well as the tolerance for risk.

The main interest of an asset allocation is to diversify an investor’s portfolio is a relevant manner. Rather than proposing a 1-size fits all, this article provides guidelines for Conservative, Moderate and Aggressive investors, based on the “Life-Cycle” allocation model.

In the case of investing for retirement, the asset allocation can be done in 2 ways:

  • Automated Allocation: most investment companies (eg. Vanguard, Blackrock, …) now have so called “Target Retirement Funds” that based on your expected retirement date, will automatically allocate and rebalance your portfolio as the investor approaches retirement. Other companies like Betterment are dedicated to automatic portfolio allocation, across investment companies (eg. mix of Vanguard and Blackrock funds). Those funds are becoming very popular, especially for 401k investments.
  • Manual Allocation: In this case the investor will select separate funds, with its own asset allocation and will manually decide when to rebalance and by how much. While it requires only a few minutes more work, the investor remains in control of its investments. This is the approach that this article will describe.

Life-Cycle investing : a starting point

The basis of the Life-Cycle investment is that an investor will go through 3 stages in life, for which there can be both different needs and different expectations:

  • Early savers: young professionals with young families. Assets are few and ambitions are high, this group generally is 20-39 years old.
  • Mid-life accumulators: these investors are established in their life and career and accumulate assets, liabilities and children. Ages are between 40 and 59.
  • Pre-retirees and active retirees: these investors are preparing the transition out of the workforce and the reliance on a paycheck to their investments. This is also the time where investment’s value need to be protected the most and risk minimized. Age group : 60 to 80+

Asset allocations for 3 life stages

The 3 graphs below are provided as a guideline to each investors’ group of Early Savers, Mid-life Accumulators and Retirees, with an added dimension on risk taking : Aggressive, Moderate or Conservative.

Early savers have the biggest advantage on their side, that is their time horizon of investment of 25+ years. This group should be the most aggressive investor while their health is good, their family requirements may still be limited and their career options remains varied while earnings can be low. It is important at this stage to contribute as much as possible to the company 401k for future higher compounded interests.

Early savers
Early savers asset allocations

The group of the Mid-life Accumulators on the other hand already have many years of experience and should have little doubt in what is their career path. This group of investors may also realize that it is now critical for them and their families to have a strong retirement plan strategy and that they have already reached half of their productive years. It should be clear at this stage what will be the needs of the family during retirement, based in part on the expected yearly spend and the 4% rule. Now is a good time to fill the gap if any and start increasing  the downside protection of the investor to protect his/her accumulated wealth.

Mid-life accumulators asset allocation
Mid-life accumulators asset allocation

For Pre-Retirees and Active retirees, their jobs should have reached their highest advancement, their earnings should be the highest, the house is paid off and the kids should now be self sufficient. This is the time where savings are likely to be the highest. During retirement, this will be the first time the investments may need to be used and 4% withdrawn yearly and the transition from a monthly paycheck to withdrawals.

Pre-retirees and active retirees asset allocation
Pre-retirees and active retirees asset allocation

What you should choose?

An investor would typically have a feel for the level of risk he is willing to taking, but it is generally only after living through a crash (eg. 2000, 2007) that one can really understand the power of emotions over reason. Some investors can be very aggressive and will run a 100% asset allocation in stocks as this has proven to be the most effective investment over the long term, but this surely isn’t for anyone. Imagine having accumulated 1M$ in your investment account in 2007 and realizing a few months later in 2008 than only 500k$ were left after the crash and that it took several years to get back to the 2007 levels. Without prior experience, a Moderate approach is much more reasonable.

To have an idea of what different asset allocations have returned in the last 100 years, Vanguard has an analysis and an interactive tool on the impact of various asset allocations over time : Vanguard Principle 2 – Develop a suitable asset allocation.


As noted by our reader Nina, it is important to note that an Asset Allocation is a tool used to diversify an Investment Portfolio which by definition does not cover an investor’s Emergency Fund, where cash is usually held. The Emergency Fund typically represents 6-12 months of living expenses in order for the investor to have go through downturns or unplanned events so that he/she will NEVER have to sell parts of his/her portfolio because of limited cashflow. Once the Emergency Fund is built, the excess of cash is invested, in the investor’s portfolio.

Dear readers, how have you selected your own asset allocation and what proportions did you select? What methods alternative weighting would you recommend and why?


Get Free Email Updates!

Enjoyed this article? Join our Financial Independence newsletter.

I agree to have my personal information transfered to MailChimp ( more information )

I will never give away, trade or sell your email address. You can unsubscribe at any time.


  1. Oh wow. this is a very good article. This story is getting better and better. I want to start planning my finances now… only one question pops up to my mind, if you are an early saver stage or mid life accumulators, what about the cash? as per your charts, you do not recommend holding any cash?, Nina

  2. Nina –
    That’s a very good point : cash rarely has a role to play in your asset allocation because it does not generate passive income nor does it appreciate. On the contrary, cash depreciates every year because of inflation.
    So typically cash is used only is a so-called “Emergency Fund”, which is what is used to cover from 6 to 12 months of living expenses and cover your cash flow. This Emergency Fund, by definition is not and investment and isn’t included in the Asset Allocation calculation.

    Very good comment, I’ll amend the article accordingly.


Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.