How does an investor choose the right combination of asset classes? 
It doesn’t have to be complicated. 

One of the most basic asset allocation models is a mix of----

60% in stocks----S&P 500 Index or the Total Market Fund.

40% in bonds---Lehman Govt./Corp. Index

According to Paul Merriman of CBS Marketwatch.com, “this split between equities and bonds is the way pension funds, insurance companies and other large institutional investors allocate their assets.  The equities provide growth while the bonds provide stability and income.”

Merriman adds that this allocation may not be the “right balance for all investors.  Many young investors don’t need bonds in their portfolios and older investors may want 70% or more of their portfolios in bonds.”

How has this allocation performed?  “For 29 years from January 1973 through December 31, 2001, it produced a compound annual return of 11 percent.”  Merriman feels that “many investors can achieve their long-term goals with that return.”

Another asset allocation model breaks it down this way---

Aggressive Growth

100% stocks – if you are in a position to tolerate market fluctuations and greater risk and are invested for more than 10 years.

Growth Portfolio

70% stocks, 25% bonds, 5% money market – if you have an investment horizon of at least 7 years and can accept greater risk, you may want to consider an investment approach that is heavily weighted toward stocks.

Balanced Portfolio

50% stocks, 40% bonds, 10% money market – if you are looking for a combination of income and growth potential in exchange for lower returns, and you won’t need some of your principal for at least 4 years, you may want to consider a portfolio that balances stocks with bonds and money markets.

Conservative Portfolio

20% stocks, 50% bonds, 30% money market—if current income is more important to you than long-term growth, and you will need some of your principal in the next 2 – 4 years in exchange for lower returns, you may want to consider a portfolio that is heavily weighted toward bonds and money market investments.  

In another asset allocation model, some experts suggest an asset allocation mix of 60% stocks (30% total-market stocks, 15% small-cap stocks, 15% foreign stocks) and 40% short-term bonds.  In this model, we will assume that you will retire at age 65.

Age: 

Less than 40 years

100 % in Equities

Of this, 40% invested in large cap-growth funds, 25% in small-cap growth funds, 25% in large-cap value funds, and 10% in international 

40 – 50 years

80 percent in equities and 20% in fixed income.  Of the equity portion, 40% invested in large-cap growth funds, 25% small-cap growth funds, 25% large-cap value funds, and 10% in international.

51 – 55 years

70% in Equities

30% in Fixed Income

Of the equity portion, 40% invested in large-cap growth funds, 25% small-cap growth funds, 25% in large cap value funds, and 10% in international.

55 – 60 years

50% in equities

50% in fixed income

Of the equity portion, 40% invested in large-cap growth funds, 10% small-cap growth funds, 40% in large cap value funds, and 10% international.

60 – 65 years

Reduce equities by 5% per year and increase fixed income by 5% per year so that at retirement you have 25% in equities and 75% in fixed income.  Of the equity portion, 40% invested in large-cap growth funds, 10% small-cap growth funds, 40% in large-cap value funds and 10% international.