Age-based asset allocation is a strategy where the percentage of assets allocated to various investment classes adjusts based on the investor’s age. This approach aims to balance risk and growth potential over time, ensuring that as investors age, their portfolios become more conservative. Below are three diverse examples that illustrate this concept in practice.
A 30-year-old professional looking to build wealth for retirement over the next 30 years. With a longer investment horizon, they can afford to take on more risk.
The investor decides on a growth-oriented portfolio, reflecting a higher risk tolerance and a focus on capital appreciation.
The allocation might look like this:
This portfolio primarily invests in stocks to capitalize on the potential for high returns, while maintaining a small portion in bonds and cash for liquidity.
As the investor approaches retirement, they may gradually shift their allocation to reduce the percentage of equities and increase bonds to minimize risk.
A 45-year-old manager who is midway through their career and starting to think about retirement in about 20 years. This investor seeks a balance between growth and income.
The asset allocation is adjusted for stability while still allowing for growth:
This strategy reflects a mix of equities for growth potential and bonds for income stability, accommodating an investor who has begun shifting focus toward preserving capital.
The investor might also consider introducing more bond funds or income-generating assets as they approach their late 50s.
A 60-year-old individual nearing retirement, who wants to ensure that their investments are secure and can provide income during retirement years.
This investor opts for a conservative allocation to protect their capital while generating income:
By reducing exposure to equities, the investor focuses on stable, income-producing investments to provide cash flow during retirement.
This allocation may further shift towards bonds and cash as the investor enters retirement, aiming for preservation of capital and steady income generation.