There’s always ongoing debate around what the best investment portfolio allocation is.
Should you stick with a more traditional approach? Or have times changed and a fresh attitude is needed? Let’s take a look.
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What are investment allocations?
This just means how much of your portfolio is put into different assets. A good portfolio should contain a healthy mix of investments so that you’re not overly reliant on just one thing.
Doing this can help minimise your risk. It can also make sure you’re exposed to lots of different markets. This way, your portfolio has a good chance of performing no matter what is going on in the world.
What is a traditional investment portfolio allocation?
For a long time, data seemed to suggest that the best performing portfolios were those with a 60/40 split between equities and bonds. So a traditional portfolio would look like this:
- 60% stocks and shares
- 40% bonds from governments, banks or companies
Rupert Thompson, Chief Investment Officer at Kingswood explains: “There has been much debate around whether there is still a place for traditional portfolios made up of 60% equities and 40% bonds.
“We believe that asset allocators have in recent years moved considerably away from the traditional 60/40 portfolio and this trend looks set to continue. The ideal investment allocation to bonds will continue to depend very much on the risk profile/time horizon of the portfolio.
“The outlook for inflation is also crucial in determining the optimal allocation going forward. This should be rather clearer in a few years’ time when it should be much more apparent whether we have moved into a new inflationary era or are back to the disinflation of the last decade.
“What is clear, however, is that the ideal bond allocation for any portfolio is significantly lower than in the past.”
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How should I allocate my investments?
This will really depend on quite a number of personal factors. Asking yourself the following questions will help you to decide the right path:
- How long are you planning to invest?
- Are you risk-averse or do you have an appetite for volatile and risky investments?
- Is your investing goal to build wealth or preserve it?
- Which assets and markets do you best understand?
If all of this sounds like too much work, you can always use an investing solutions provider that will build and manage a portfolio for you.
What is a good investment portfolio allocation?
If the 60/40 portfolio is no longer a favourable option, what other alternatives are there?
Thompson does suggest that if you want to stick with bonds, there are still some attractive choices out there. You just have to do a bit more digging to find them. Emerging market bonds is one area he believes still offers a decent risk/reward profile for investors.
Moving away from bonds entirely, there are other assets that may act as a good balance against equities and protect against inflation. These could include things like:
- Precious metals (gold and silver)
Cryptocurrency is another asset Thompson believes might play a bigger role in future portfolios. But for now, the wild swings in price mean that cryptocurrency doesn’t fulfil the key role of bonds, which is to reduce portfolio risk.
There is no magic formula for the perfect investment portfolio allocation.
Sometimes it can be a good idea to let professionals help manage your portfolio. This can be done fairly cheap these days.
If you do want to design your own perfect portfolio, make sure you’re using a share dealing account that gives you access to a wide range of assets. This way you can build an investment portfolio to stand the test of time and perform well under different conditions.
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