Asset Allocation Frameworks
- Traditional 60/40 Portfolio: 60% equities, 40% bonds. Historically delivered ~7–9% annual returns with moderate volatility.
- Risk Parity: Allocates based on risk contribution (e.g., Bridgewater’s All Weather Fund). Favors bonds during equity downturns.
- Factor-Based Investing: Targets factors like value, momentum, or low volatility (e.g., iShares Edge MSCI USA Value Factor ETF).
Diversification Strategies
- Geographic Diversification:
- Developed markets (U.S., Europe) vs. emerging markets (India, Brazil).
- Example: Adding MSCI Emerging Markets ETF (EEM) reduces reliance on U.S. growth.
- Sector Rotation: Adjusting exposure to cyclical (tech) vs. defensive (utilities) sectors based on economic cycles.
- Multi-Asset Diversification: Combining stocks, bonds, real estate, and commodities to minimize correlation.
Lifecycle Investing
- Age-Based Adjustments:
- 20s–30s: Aggressive allocation (80–90% equities).
- 40s–50s: Gradual shift to bonds (60/40).
- 60+: Conservative mix (40% equities, 50% bonds, 10% cash).
- Target-Date Funds: Automatically rebalance toward bonds as retirement nears (e.g., Vanguard Target Retirement 2050 Fund).
Example Portfolio Breakdowns
- Conservative (30% equities, 60% bonds, 10% cash):
- Equities: Dividend stocks (Procter & Gamble) + S&P 500 ETF.
- Bonds: Treasury notes + AAA corporate bonds.
- Aggressive (90% equities, 10% alternatives):
- Equities: Growth stocks (Amazon) + emerging markets ETF.
- Alternatives: Bitcoin (5%) + REITs (5%).
Case Study: Yale University’s endowment, under David Swensen, achieved 10% annual returns (1985–2020) via heavy alternatives (private equity, real assets).
