Asset Allocation Examples: Equity vs. Fixed Income

Understanding Asset Allocation between Equity and Fixed Income

Asset allocation is a crucial aspect of investing, determining how to distribute your investments across various asset categories. In this context, equity refers to stocks or shares that represent ownership in a company, while fixed income typically includes bonds or securities that provide a return in the form of fixed periodic payments. Balancing these two components can help investors manage risk and achieve their financial goals. Below are three diverse examples of asset allocation between equity and fixed income.

Example 1: Conservative Retiree Portfolio

In this scenario, we consider a 65-year-old retiree, Jane, who is primarily focused on preserving her capital while generating a stable income to support her retirement. Given her age and risk tolerance, Jane opts for a conservative asset allocation.

Jane decides to allocate her investment portfolio as follows:

• Equity (Stocks): 30%
  Jane invests in a mix of blue-chip stocks and dividend-paying stocks, focusing on established companies with a history of stable earnings. This strategy allows her to benefit from potential capital appreciation while receiving regular dividend income.

• Fixed Income (Bonds): 70%
  To ensure a steady cash flow, Jane invests heavily in fixed income securities, including:

  • U.S. Treasury bonds (40%)
  • Corporate bonds (20%)
  • Municipal bonds (10%)

This allocation not only provides Jane with lower volatility but also ensures she has a reliable income stream throughout her retirement years.

Notes:

• Variations: If Jane’s financial situation changes or if interest rates rise significantly, she may consider adjusting her bond allocation or increasing her equity exposure for growth.

Example 2: Aggressive Young Investor

For this example, we look at Tom, a 30-year-old tech professional who is willing to take on more risk in exchange for higher potential returns. Tom’s long investment horizon allows him to weather market volatility, so he chooses an aggressive asset allocation.

Tom allocates his investment portfolio as follows:

• Equity (Stocks): 80%
  Tom invests heavily in technology stocks and growth-oriented companies, believing in their long-term potential. His equity holdings include:

  • Individual tech stocks (55%)
  • Exchange-traded funds (ETFs) focusing on growth sectors (25%)

• Fixed Income (Bonds): 20%
  To maintain some level of stability, Tom includes:

  • High-yield corporate bonds (10%)
  • U.S. government bonds (10%)

This allocation reflects Tom’s focus on capital growth while still retaining a small buffer of fixed income to mitigate risk.

Notes:

• Variations: As Tom ages and his financial goals change (e.g., buying a home or starting a family), he may gradually shift towards a more balanced allocation.

Example 3: Balanced Family Portfolio

In this scenario, we have Sarah and John, a married couple in their late 40s with children. They are looking to grow their investments while also ensuring that they have enough savings for their children’s college education.

Their portfolio is structured with a balanced approach:

• Equity (Stocks): 60%
  Sarah and John invest in:

  • Large-cap stocks (30%)
  • Index funds tracking the S&P 500 (20%)
  • International stocks (10%)

• Fixed Income (Bonds): 40%
  To provide stability and income, they allocate their fixed income investments as follows:

  • Investment-grade corporate bonds (20%)
  • U.S. Treasury bonds (20%)

This balanced allocation allows them to participate in market growth while reducing overall portfolio risk, making it suitable for their family’s long-term financial objectives.

Notes:

• Variations: As their children approach college age, Sarah and John might consider shifting a portion of their equity investments into safer fixed income assets to preserve capital for tuition expenses.