Let’s face it, we all want the ideal asset allocation. That perfect combination of asset classes that will make our dreams come true. A portfolio of funds that will repay our faith many times over, that understands our moods, will never test our sanity and will grow with us on the beautiful journey of life…

Well, GET OVER IT!

(Ahem. Sorry).

Get over it.

The perfect asset allocation doesn’t exist. Asset allocation is as much art as science. It doesn’t come with an answer correct to five decimal places – or indeed any decimal places – because the results will depend on unpredictable events yet to come.

Even Nobel Prize-winning Harry Markowitz didn’t bother computing his own efficient frontier, saying:

“I should have computed the historical co-variances of the asset classes and drawn an efficient frontier.”

But, he said, “I visualized my grief if the stock market went way up and I wasn’t in it — or if it went way down and I was completely in it.

So I split my contributions 50/50 between stocks and bonds.”

Still, like cats, dogs and soul mates, some asset allocations are more likely to fit with our temperaments and life stages than others.

Do you crave stability? A steady, reliable Eddy without too much drama? Or do you want fireworks? A volatile, tempestuous type that will show you the stars and drag you through hell?

It takes all sorts, so let’s glide through the the typical asset allocations you might meet, and see if we can find one in your postcode.

What asset allocation suits you?

Mr Average

Diversified, balanced, neither overly cautious, nor balls-out aggressive, Mr Average is a perfectly respectable choice. Ideal for someone in their 30s or 40s who doesn’t want too much complication in their life but still wants the chance to grow.

Asset class Allocation (%)
UK equities 10
Developed world ex UK 30
Emerging markets 10
Global property 10
Government bonds (Gilts) – short dated 20
Index-linked government bonds 20

This is a middle of the road portfolio that will do the job for the majority of investors. It diversifies across the main asset classes, and tilts 60:40 in favour of equities over bonds so you can expect reasonable growth but still have plenty of fixed income assets ready to break your fall when markets plunge.

The cautious or older investor can add 10-20% more bonds, while the more youthful or adventurous can spank up the equity or consider The Risk Taker portfolio, below.

The Virgin

Never done it before? Nervous? Not sure if you’ll like it? Then get into the groove with this simple and gentle soul.

Asset class Allocation (%)
Global equities 50
Government bonds (Gilts) – short dated 50

VWRL is a good global equity Exchange Traded Fund (ETF).

First-timers who don’t know what to expect are best off with a cautious portfolio that nevertheless has a bit of everything. It’s not too demanding, and will help you find out more about yourself when the markets cut up rough.

Young Buck

Aggressive and volatile, this is a portfolio for someone with time on their side and not a lot to lose.

Asset class Allocation (%)
Global equities 70
Emerging markets 10
Government bonds (Gilts) – intermediate 20

The heavy equity allocation promises fast growth but also big losses in a down turn. A 20-something has plenty of years to make up for any losses and is likely to do well if they buy lots of equities cheaply in the early years, which then bounce back later.

A lazy young buck could even just buy an All-World tracker or the 100% LifeStrategy fund and forget about bonds entirely if they are feeling super-aggressive. But be warned that you only really find out just how emotionally vulnerable you are in the dark downturns, not in the happy good times.

The Silver Fox

Steady, wise, it doesn’t have much bounce but is still quite spry for its age.

Asset class Allocation (%)
UK equities 20
Developed world ex UK 10
Emerging markets 5
UK property 5
Government bonds (Gilts) – short dated 30
Index-linked government bonds 30

A moderately cautious choice for someone nearing retirement or in early retirement. Equities still offer some growth but the large bond allocation offsets risk. Note that the equities and index-linked bonds (linkers) protect an older investor against one of their biggest threats – inflation.

Made Man

An embarrassment of riches means this one no longer has to play the game.

Asset class Allocation (%)
Index-Linked bonds 100

If you’ve more than enough assets to live on for the rest of your life then why take any more risk? You can afford to put your money in the safest wealth-preserving asset you can find, kick back and enjoy.

A linker ladder is better for retirement income than a linker fund, but harder work.

The Safe Choice

When you’re no longer working, you want someone who can meet all your needs but still pull the occasional surprise.

Asset class Allocation (%)
Annuity Variable
UK-biased equities The rest

Let’s say you retire with just about enough assets to provide for the basics – but it’s a close run thing. In this case an annuity can be used to nail down your minimum income floor.

Ideally an escalating annuity will inflation proof your guaranteed retirement income, but a fixed annuity can still work. The rest of your pot is invested in diversified equities with a strong UK bias to provide the potential for growth without much currency risk.

The idea is to use the growth from shares to compensate for the dwindling value of the fixed annuity in later life, as well as a source of emergency cash and bequests.

The Risk Taker

A deep and complex character – highly rewarding at times but can leave you wondering whether it’s all worth it.

Asset class Allocation (%)
Global equities 36
Global value 12
Global small cap 12
Emerging markets 8
Emerging market value 2
Emerging market small cap 2
Global property 8
Government bonds (Gilts) – short-dated 10
Index-Linked government bonds 10

Risk factors like value and small cap can juice your returns but at a price. The price is amped up volatility as you invest in riskier companies that are more vulnerable when the economy tanks.

This is a realm suitable only for investors who’ve researched the risk factor phenomenon and understand exactly what they’re getting into. Small value funds or fundamental indexing ETFs can replace the need for separate value and small cap vehicles, and, advanced practitioners may eventually consider momentum and quality funds.

A Little Bit Of What You Fancy

Has a finger in every pie but struggles to make a meaningful commitment to any of them.

Asset class Allocation (%)
UK equities 5
Global equities 35
Emerging markets 10
Global property 5
Government bonds (Gilts) – short dated 10
Index-linked government bonds 10
Global corporate bonds – investment grade 5
Global government bonds 10
Commodities 5
Gold 5

This portfolio contains every asset class you can make a decent case for holding bar the risk factors. However the level of complexity is only appropriate for passionate investors with large portfolios. Even then, 5% in gold probably isn’t going to make much difference to your outcome.

Fashion Victim

Finds it difficult to sit still, easily led, fickle, prone to bursts of enthusiasm and abrupt shifts in loyalty and direction, wants to be popular and on the cutting-edge, status orientated, good for a laugh…

Asset class Allocation (%)
Pick ‘n’ mix the asset classes above plus… Whatevs
High tech Whatevs
Wood Whatevs
Global water Whatevs
Low volatility Whatevs
Hedge funds Whatevs
Silver Whatevs
Oil and gas Whatevs
Frontier markets Whatevs
Clean energy Whatevs
China (or how about a MINT?) Whatevs
Consumer staples (or any other random sector) Whatevs
Global infrastructure Whatevs
3D printing Whatevs

Throw in a some random shares, Bitcoins, a bit of private equity, some vintage wine, art in a vault and so on in an ever decreasing semblance to any sort of plan.

Add decimal points to any allocation for the comforting delusion that there may be some kind of science at work. You’ve paid expensively for the advice – and will keep paying for it for many years to come.

Grandma wouldn’t approve of this one. He’s a wrong ‘un.

Nobel Prize-winning economist

AKA Harry Markowitz.

Asset class Allocation (%)
Global equities 50
Government bonds (Gilts) – short dated 50

If it’s good enough for Harry, the father of Modern Portfolio Theory, then… also notice how similar this is to The Virgin allocation.

Remember, the decision that will most affect your eventual returns is your division between bonds and equities.

The Man For All Seasons

AKA Harry Browne.

Asset class Allocation (%)
Equities 25
Government Bonds (Gilts) – long dated 25
Cash 25
Gold 25

The Permanent Portfolio offers fair long-term returns, low volatility, and excellent protection against most economic weathers: inflation (equities and gold save the day), deflation (the long bonds and cash soften the impact), recession, and extreme interest rates.

The Survivalist

Wild-eyed crank promises weekends in the woods.

Asset class Allocation (%)
Farmland 16.666
Water 16.666
Gold 16.666
Guns 16.666
Ammo 16.666
Zombie repellent 16.666

When the flames of the Apocalypse finally consume Western decadence then you’ll give the FTSE 100 the beating of its life. Yee-haw!

Which one are you?

So, how did you do? If you scored mostly ‘A’s then – hang on, this isn’t that sort of article!

If you’re not sure which one of these beauties suits you, then tune in next post when we’ll talk about how to shape your own asset allocation from scratch.

Remember these are model allocations that show you roughly where you want to be. Your asset classes should be chosen from the picks above1 but your personal allocation should be adapted to your goals, risk tolerance, and time horizon.

Your allocations should also change as your circumstances change, and as you age. Our posts on asset allocation rules of thumb and developing a financial plan should help explain what I mean.

In the meantime, if you’re ready to roll then passive investors can cover off each asset class using index trackers from the low cost selection we’ve picked out.

Take it steady,

The Accumulator

  1. Not so much the zombie repellent and fashion victim set.

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