Portfolio Asset Allocation Explained - How To Adjust by Age
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Күн бұрынAsset allocation refers to the ratio among different asset types in one’s investment portfolio. Here we’ll look at how to set one’s portfolio asset allocation by age and risk tolerance, from young beginners to retirees, including calculations and examples.
// TIMESTAMPS:
00:00 - Intro
00:31 - What Is Asset Allocation?
00:58 - Why Is Asset Allocation Important?
04:36 - Asset Allocation and Risk Tolerance
07:27 - Asset Allocation by Age Calculation
09:22 - Asset Allocation Examples
11:13 - Conclusion
12:14 - Disclosure
12:40 - Disclaimer
13:11 - Outro
// SUMMARY:
Asset allocation simply refers to the specific allotment of different asset types in one’s investment portfolio based on personal risk tolerance, goals, and time horizon. The three main classes are stocks, fixed income, and cash or cash equivalents.
These different asset classes behave differently during different market environments. The relationship between two asset classes is called asset correlation. For example, stocks and bonds are held alongside one another because they are usually negatively correlated, meaning when stocks go down, bonds tend to go up, and vice versa. That uncorrelation between assets offers a diversification benefit that helps lower overall portfolio volatility and risk.
Asset allocation is more important over the long term than the specific selection of assets. That is, choosing what percentage of your portfolio should be in stocks and what percentage should be in bonds is more important - and more impactful - than choosing, for example, between an S&P 500 index fund and a total market index fund. Vanguard actually determined that roughly 88% of a portfolio’s volatility and returns are explained by asset allocation. Think of asset allocation as the framework upon which your portfolio rests.
► Read the blog post here: www.optimizedportfolio.com/as...
► Vanguard paper on asset allocation: personal.vanguard.com/pdf/ISG...
► Vanguard portfolio allocations historical stats: personal.vanguard.com/us/insi...
► Vanguard asset allocation questionnaire: personal.vanguard.com/us/Fund...
#investing #assetallocation #vanguard #stocks #stockmarket #portfolio
// Books on Asset Allocation
► Asset Allocation: Balancing Financial Risk by Roger Gibson - amzn.to/2KARXaF
► The Intelligent Asset Allocator by William Bernstein - amzn.to/3asdiNX
► Rational Expectations: Asset Allocation for Investing Adults by William Bernstein - amzn.to/3cCWu8s
► All About Asset Allocation by Rick Ferri - amzn.to/3awi9xM
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Disclaimer: This is not financial advice, investing advice, or tax advice. The information presented is for informational, educational, and entertainment purposes only. Investment products discussed are for illustrative purposes only. It is not a recommendation to buy, sell, or otherwise transact in any of the products mentioned. I always attempt to ensure the accuracy of information presented but that accuracy cannot be guaranteed. Do your own due diligence. All investing involves risk, including the risk of losing the money you invest. Past performance does not guarantee future results. Opinions are my own and do not represent those of other parties mentioned. Read my lengthier disclaimer here: www.optimizedportfolio.com/te...
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@jugzster 3 жыл бұрын
Haven’t heard of (age-20)*2 before. Thanks for the helpful info!
@OptimizedPortfolio 3 жыл бұрын
I think you meant (age-40)*2
@Guest-dl2vw 2 жыл бұрын
I think he is spot-on with age-20 for bonds. you have a typo if you are showing age -20 times 2! Say you are 80, then 80-20 x 2 = 120, which would be of course impossible since you cant have more than 100% of something. go age - 20 for bonds and be done with it., at 80, you'd have 60% bonds, not bad, though for more aggressive Id probably go age - 30 for bonds.
@dominant_trader0047 3 жыл бұрын
Thanks mate !! Great help 🤜💥🤛
@OptimizedPortfolio Жыл бұрын
Thanks for watching!
@arib8367 3 жыл бұрын
This guy has a great voice
@OptimizedPortfolio 3 жыл бұрын
Hey thanks!
@wread1982 2 жыл бұрын
Great video sir!!
@OptimizedPortfolio 2 жыл бұрын
Thanks!
@georgezuwala7075 11 ай бұрын
Your doing a great job I like Ben felix but your coming along keep it up.
@OptimizedPortfolio 8 ай бұрын
Thanksss
@vs5948 2 жыл бұрын
Great video . Master class . Serendipity I found your video . And your extensive reply underneath, regarding diversification to international stock market cleared most of my doubts .. thanks a ton
@OptimizedPortfolio Жыл бұрын
Thanks so much!
@geraldineb.9204 2 жыл бұрын
Thanks for sharing! I am in my late 30s and I'm 90 stocks and 10 bonds. I'm happy with my returns so far. I'm planning to sell my bonds after they bounce back. Since I bought this 2yrs ago, I have lost some money in my bonds, lol
@OptimizedPortfolio Жыл бұрын
Thanks for watching and for sharing your experience, Geraldine!
@ILOVEISRAELETERNALLY 2 жыл бұрын
Thank you for making this video.
@OptimizedPortfolio Жыл бұрын
Thanks for watching!
@ferchanguitoable 2 жыл бұрын
Hi John! I found your channel two days ago and I already watched and liked all of your videos! Great content! I want to mention my asset allocation it is 25% in large blend, 25% mid cap blend, 25% small cap value and 25% long term treasuries. It performed great during the lost decade. Rebalancing with new deposits and every time the asset allocation drifts by + or - 5%. I still don’t have Inter national, but If I added it would be 20% across all assets. Could you review my portfolio and give me your thoughts? Thank you in advance.
@OptimizedPortfolio 2 жыл бұрын
Thanks! I appreciate it! I can't provide personalized advice. That portfolio sounds similar to mine but I like int'l diversification in stocks.
@Guest-dl2vw 2 жыл бұрын
I like your suggestion of age - 20 set for bond allocation. I'd probably suggest 110-age for bonds. I'd go with VSCSX and or VBTLX for bonds; VTSAX for stocks and be done with it. I applaud your video, totally excellent. I'd add to your materials Nick Doyle's videos on Achieving Financial Independence. Maybe you and Nick could team up on a video? Oh, I applaud your suggestion of Bernstein, Gibson and Ferri. I'd add The Coffeehouse Investor by Schultheis.
@OptimizedPortfolio 2 жыл бұрын
110-age for stocks % is the same thing as age-10 for bonds %. A bit too conservative for my tastes, but varies based on risk tolerance obviously. No one size fits all. I've got a blog post on Schultheis's Coffeehouse Portfolio that I'll do a video on at some point. Thanks for the comment!
@mrc6993 3 жыл бұрын
Great videos I’m glad I found this channel. I have a question as to your opinion on the target date retirement fund (VFIFX) vs building my own three fund portfolio 10 percent bonds, 20 percent intl and 70 percent total us market. I am beginning a ROTH IRA at age 33 and considering the two options. Signed up through vanguard already. Thanks in advance!
@OptimizedPortfolio 3 жыл бұрын
Thanks for the kind words and thanks for watching! I can't provide personalized advice, but I'd say it may depend on one's desire for simplicity. A 3 Fund Portfolio will require a little more hands-on management - albeit still minor - than a target date fund that is completely hands-off. Also depends on whether or not the investor wants to use different allocations and/or different funds than what the target date fund is using.
@mrc6993 3 жыл бұрын
@@OptimizedPortfolio thanks for the speedy response I appreciate your input
@OptimizedPortfolio 2 ай бұрын
@@mrc6993 Anytime!
@Cwilly13ify 3 жыл бұрын
i'm 100% NTSX in my taxable. Any ideas on how to spice it up? I'm already pretty diversified with International and Small cap in my Roth
@OptimizedPortfolio 3 жыл бұрын
Me too. I explored some use cases here: www.optimizedportfolio.com/ntsx/
@henrycarey5657 3 жыл бұрын
Found your website first which led me to your channel, love the content 👍🏻 how do you feel about a 22 year old who is going to get started investing going 80/20 with VTI & VXUS? I thought about having 10% bonds mixed in there but I wanna take advantage of my youth and try and be very aggressive in growing my capital.
@OptimizedPortfolio 3 жыл бұрын
Thanks Henry! Glad you're finding the content useful. 80/20 VTI/VXUS sounds like a solid idea to me. Simple, efficient, and effective.
@vs5948 2 жыл бұрын
I would be happy to get your valuable opinion, whether you would advocate Dollar cost averaging or wait and buy on dip ..
@OptimizedPortfolio Жыл бұрын
I've got a couple separate videos on DCA and market timing.
@rudged123 3 жыл бұрын
Thanks for an elegantly brief explanation of asset allocation, and in particular why historically bonds and fixed securities have held an important place in such decisions. This being said, there is reason to believe that the bond market is no longer negatively correlated with the stock market. Do you still advocate the inclusion of bonds? bond alternatives?
@OptimizedPortfolio 3 жыл бұрын
Thanks for the kind words! Just because we expect bonds to have lower future returns does not mean they are not still the best diversifier for stocks. I delved into this idea here: www.optimizedportfolio.com/ginger-ale-portfolio/#us-long-term-treasury-bonds-10
@rudged123 3 жыл бұрын
@@OptimizedPortfolio Thanks for the detailed explanation. Have you by any chance read J. L. Collin's The Simple Path to Wealth? He advocates a 100% position in stocks while you are gainfully employed and you (and your employer) are making regular contributions to retirement plans, what he calls the wealth accumulation stage. Once you retire (the wealth preservation stage) he advocates inclusion of bonds to smooth out the volatility in the absence of regular contributions.
@OptimizedPortfolio 3 жыл бұрын
@@rudged123 I haven't read it but I'm familiar with him and his portfolio (www.optimizedportfolio.com/jl-collins-simple-path-to-wealth-portfolio/). That idea roughly matches the plan to be 100% stocks while young and then accelerate a shift into bonds near retirement. A sudden massive switch in one's AA at retirement (e.g. from 100/0 to 60/40), if that's what you mean, doesn't make much sense to me though. Imagine if you had planned to retire in January, 2009 after being 100% stocks in 2008... He also advocates for 100% U.S. stocks, which, for me, immediately discredits most of whatever else he says. Sequence risk in retirement adds another layer of complexity: www.optimizedportfolio.com/sequence-risk/
@rudged123 3 жыл бұрын
@@OptimizedPortfolio One clarification: In his book he draws attention to the fact that the S&P 500, while technically US based, is filled with international companies, and as such, he claims an index based off of the S&P does contain significant exposure to international markets.
@OptimizedPortfolio 3 жыл бұрын
@@rudged123 I've always found that argument a bit silly. The U.S. is still only one country out of many in the world, so we wouldn't expect it to outperform every year (and indeed it doesn't). Excluding ex-US stocks means you're missing out on leading companies that happen to be based elsewhere. Similarly, there have been periods where a global portfolio outperformed a U.S. portfolio. This was especially true throughout the 1900's. During the period 1970 to 2008, for example, an equity portfolio of 80% U.S. stocks and 20% international stocks had higher general and risk-adjusted returns than a 100% U.S. stock portfolio. Specifically, international stocks outperformed the U.S. in the years 1986-1988, 1993, 1999, 2002-2007, 2012, and 2017. Emerging Markets and international small cap stocks have crushed the U.S. market historically. If we go narrower into Value stocks in these geographies, the difference in performance widens even more. And this is just talking about performance. The volatility and risk reduction benefits are another conversation entirely, which is of huge significance for a retiree. In short, geographic diversification in equities has huge potential upside and little downside for investors.
@susanl8478 3 жыл бұрын
Some big firm in Boston is dealing with most of my money but I have a small portfolio on E-trade that I have been using to learn about the market. Although I have only been investing myself for about 6 months I have learned a lot but still have a long way to go. You have helped so much in moving me forward. I am old by the way so this was great ! I need more BONDS for sure. Can use recommend (illustrate) a good Bond ETF?
@OptimizedPortfolio 3 жыл бұрын
Susan, thanks so much for your comment! It's really great to hear that you've found the content helpful. I usually suggest roughly matching bond duration to your time horizon. I listed some good treasury bond funds here: www.optimizedportfolio.com/best-treasury-bond-etfs/
@susanl8478 3 жыл бұрын
@@OptimizedPortfolio Great! Bonds seem kind of 'boring' but I now understand their importance! I wish you lived across the street ! Just looked at it ... now I need to start studying the difference between short-term and long-term ... but I will.
@OptimizedPortfolio 3 жыл бұрын
@@susanl8478 Hah! Indeed, bonds unfortunately get a bad rap for being "boring" or for only being useful for retirees, both of which are mischaracterizations. They are a crucial ingredient in any well-diversified investment portfolio. Long-term bonds can sometimes even be a wilder ride than stocks. Most investors have a lower risk tolerance than they actually realize, only realizing it when a stock market crash occurs. If you've got the time, I delved into bonds extensively - explaining what they are, their purpose, their behavior, and how to choose a bond duration - in the following posts for which I haven't made videos yet, that will definitely help your decision process: www.optimizedportfolio.com/how-to-buy-bonds/ www.optimizedportfolio.com/60-40-portfolio/
@susanl8478 3 жыл бұрын
@@OptimizedPortfolio Excellent. During lock-down I have devoted this time to trying to make sense of all of this and will delve into it tomorrow. My mind is swimming. Thanks again. I put the e-mail response to 'save' and look forward to reading it all and will wait for the videos !!! I have learned a lot about my 'learning style' ... need the written explanation AND the videos until it finally cements itself in this old brain!!!!!
@OptimizedPortfolio 3 жыл бұрын
@@susanl8478 Sounds good. Investing is a constant learning process. I still learn new things now 12 years later. It can seem like an overwhelming amount to take in at first but just take it one small step at a time.
@marcello.menjivar Жыл бұрын
I believe I have a very high risk tolerance.
@OptimizedPortfolio Жыл бұрын
Thanks for watching!
@duneme 2 жыл бұрын
I have about $2m in Rental Houses, can these be treated as Bonds?
@OptimizedPortfolio Жыл бұрын
No
@bubberlance4263 3 жыл бұрын
What designer selects your wardrobe?
@OptimizedPortfolio 3 жыл бұрын
J.Crew
@RetrieverTrainingAlone 3 жыл бұрын
Based on age 110 - age, so 110 - 30 = 80 % in stocks, at 65 years old 110 - 65 = 45% in stocks. .
@OptimizedPortfolio 3 жыл бұрын
This is the same as "age - 10" for bonds. Still too conservative IMHO. A 20 year old would already have 10% in bonds.
@dennis6325 11 ай бұрын
Investment horizon is only one thing to consider. Market value is another. In general, go heavier into stocks when young and market is cheap. An allocation strategy that only takes your age into consideration is too one dimensional in my opinion.
@OptimizedPortfolio 11 ай бұрын
I'm using age as a proxy for horizon here by assuming starting age and retirement age. Sorry if that wasn't clear. Indeed, AA is a function of horizon. Market timing tends to be more harmful than helpful though in terms of trying to guess cheap/expensive.
@OptimizedPortfolio 11 ай бұрын
And I titled it that because everyone searches "asset allocation by age."
@dennis6325 11 ай бұрын
@@OptimizedPortfolio I understand what you are saying, but I have to disagree with you here. Pension fund managers have been keeping retirees safe for years using duration matching. Specifically, I am talking about matching duration of assets to liabilities. Duration of liabilities, in this case, is related to the investor's time horizon. I use the person's average age during retirement less their current age. For example, an investor who is 50 years old, plans to retire at 65 and is expected to die at 85 (based on life expectancy tables), would have an average age during retirement of 75. Subtracting their current age of 50, you get an investment horizon or "duration" of 25 years. Next, we can think of stocks as a perpetuity. A perpetuity is an investment that pays a constant cash flow that grows at a constant rate forever (not at all the case, but good enough for analysis purposes). The duration of a perpetuity is approximately the cost of the investment divided by its current annual cash flow (think dividends or earnings). Or in the case of stocks, Price divided by Earnings. Note: the duration of the perpetuity does not depend on the growth rate of those earnings only on the current amount of earnings. This is convenient because this means the P/E ratio is an excellent proxy for the duration of stocks. If we assume any allocation to cash (or short-term treasury bonds) has essentially zero duration, then only the portion the investor puts into stocks adds duration to the portfolio. Therefore, to match the investor's liability to the duration of the investor's assets, we just take the investor's investment horizon and divide by the P/E ratio of stocks. For example, if an investor has an investment horizon of 25 years and the P/E ratio is also 25, then 25-year horizon divided by a P/E ratio of 25 equals 100% allocation to stocks. If the P/E ratio was 30 then he should put 25/30 equals 83% in stocks. If the P/E ratio is 15, then this investor should consider putting 25/15 = 167% in stocks (this means they should consider borrowing 67% and putting it into stocks). There you go, a simple and mathematical approach to portfolio allocation using age and value. Some investors may not be comfortable using leverage, but research shows it would usually benefit young investors. Tweaks to this approach, could use a smoothed value of earnings such as the Schiller P/E ratio or 3-year trailing average. Also, if an investor was super conservative, they could just use the P/D ratio (price-to-dividend ratio) instead of the P/E ratio. Or smoothed earnings could be estimated by taking the current dividend and dividing by the typical payout ratio. These are all reasonable tweaks to smooth out the E in the P/E equation for volatile times, but I think you get the point. My encouragement here is to be consistent! Decide on a method and stick with it. Using the P/E ratio like this in concert with the investor's horizon, forces the portfolio manager to wisely reduce stock allocation as P/E rises (stocks get expensive) and as the investor gets older in a very systematic mathematical manner. Hope this gives you an idea on how this can be done in a prudent & wise manner without having to "guess if the market is cheap/expensive".
@OptimizedPortfolio 11 ай бұрын
I think I completely misread your comment originally as "horizon is THE only thing to consider."
@OptimizedPortfolio 11 ай бұрын
@@dennis6325 I'm pretty well versed on duration matching and I'm always preaching that for bonds. Timing stocks using valuations sounds nice in theory, but sadly, P/E and even CAPE give us no reliable predictive power. P/E of individual stocks tells us something. P/E of the market is essentially random - no reason it can't increase or decrease. The unexpected outcome can also dominate the expected outcome for extended periods, even one's entire horizon. Individual investors aren't pensions. Yes, all else equal, P/E of the market tells us something about relative expected returns, but it doesn't tell us if it's over- or under-valued and it doesn't allow us to time things reliably. The evidence is pretty clear on that.
@georgesontag2192 6 ай бұрын
Stocks and bonds can drop at the same time. Assest allocation is over rated on how it reduces risk.
@OptimizedPortfolio 6 ай бұрын
They can, but they usually don't. More importantly, asset allocation is simply the ratio of various assets in one's portfolio. By definition, it cannot be "over rated."
@cihant5438 2 жыл бұрын
1:24 First you said negatively correlated, then you said uncorrelated.
@OptimizedPortfolio 2 жыл бұрын
The term "uncorrelated" is basically inclusive of the possibility of negative correlation. Stocks and bonds have had a negative correlation on average historically, but this is not always the case.
@cihant5438 2 жыл бұрын
@@OptimizedPortfolio This is not how the word "uncorrelated" is used in statistics. Uncorrelated means zero correlation.
@OptimizedPortfolio 2 жыл бұрын
@@cihant5438 Yes, they usually have a correlation of about zero and tend to become negatively correlated during market crashes. Asset correlations are dynamic. Recently stocks and bonds have been positively correlated.
@OptimizedPortfolio 2 ай бұрын
@@cihant5438 Actually, given 2 variables, we would call r < -0.5 negatively correlated, -0.5 < r < 0.5 uncorrelated, and r > 0.5 positively correlated. Source: degree in statistics. A correlation of exactly zero is never going to exist. It should be intuitive that a correlation of 0.1, for example, while positive, is not at all strong or statistically significant.
@jdavis6650 10 ай бұрын
OP you suggest that Stocks and Bonds are negatively correlated. Wake up. Look at the data.
@OptimizedPortfolio 10 ай бұрын
Uncorrelated. More importantly, negatively correlated specifically during stock market crashes. I also made this video 3 years ago when that avg. correlation was lower. They shift over time. But yes, uncorrelated: www.portfoliovisualizer.com/asset-correlations?s=y&symbols=VFINX%2CVFITX&timePeriod=1&tradingDays=60&months=36
@OptimizedPortfolio 2 ай бұрын
Still uncorrelated, in case you were wondering: www.portfoliovisualizer.com/asset-correlations?s=y&sl=2ANdMpYSJ6pmXThsNoFbqe
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