Recommended Asset Allocation

Recommended asset allocation. Optimal asset allocation for different investment risk appetites and age groups.

Optimal Asset Selection

Richard Ferri suggested these guidelines for asset selection, which are very helpful:

• First, the underlying assets of the investments are fundamentally different from the underlying assets of other investments in the portfolio.
• Second, there has historically been periods of negative or low positive correlation with other investments in the portfolio.
• Third, these investments must be accessible. That is, they can be easily purchased through liquid, low-cost and broadly diversified funds such as an index mutual fund, an exchange traded fund, a no-load actively managed mutual fund or an inexpensive unit investment trust.

Asset Allocation for Young Investors

Optimal Asset Allocation: Young investors have more time to learn the market, and are generally more ambitious in their investment objectives. Thus, they should seek to investment at least half of their portfolio in equities and REITs; the most aggressive young investors might invest up to 80 percent in equities and REITs.

However, a portfolio made up of 100 percent equities and REITs is highly risky and should be avoided as far as possible. The levels of risk are likely unacceptable to even most young investors. These portfolios also offer no room for rebalancing.

Retirement Asset Allocation

Optimal Asset Allocation: Retirees should generally adopt a more conservative asset allocation approach. That would mean a lower percentage of the portfolio invested in equities and REITs, and a larger percentage invested in fixed income assets.

Approximately 10 percent of the portfolio should be invested in short-term bonds, as these lower the overall volatility of the portfolio while providing a high-yield cash substitute.

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