As each asset class has varying levels of return and risk, one should consider their risk tolerance, investment objectives, time horizon and available capital as the basis for their asset composition. Investors with a long time horizon and larger sums to invest may feel more comfortable with high risk, high return options. Contrastively, investors with smaller sums and shorter time spans may feel more comfortable with low risk, low return allocations.
To make the asset allocation process easier for clients, investment companies create a series of model portfolios, each comprising diforewent proportions of asset classes. These portfolios of different proportions satisfy a particular level of investor risk tolerance. In general, these model portfolios range from conservative to very aggressive.
- Very Aggressive
- Moderately Aggressive
- Moderately Conservative
Conservative model portfolios generally allocate a large percent of the total portfolio to lower-risk strategies such as fixed-income and money market securities. The main goal of a conservative portfolio is to protect the principal value of your portfolio. One could invest in the equity portion in high-quality blue chip companies, or an index fund, with less exposure in foreign exchange since the goal is not to beat the market.
Aggressive portfolios main goal is to obtain long-term growth of capital. The strategy of an aggressive portfolio is often called a “capital growth” strategy. To provide some diversification, investors with aggressive portfolios usually add some fixed-income securities.
- Fixed Income Securities
- Cash and Equivalents