The three main investor risk profiles are Income, Income & Growth, and Growth. In general, younger investors typically favor “Growth” given their longer investment time frame, and older investors may need “Income,” in order to focus on cash flow and risk control.
InvestableBenchmarks.com provides strategic sample portfolios for each risk profile. The asset allocations were mainly influenced by the core portfolio prescribed by Yale University’s CIO, David Swensen.
Swensen has one of the best institutional performance track records, and he is widely considered to be one of the world’s most savvy investors. Over the past decade, all three investable benchmark portfolios performed very well, delivering roughly 8% annually.
Put Your Age in Fixed Income
A simple way to determine your risk profile is to “use your age,” as your portfolio asset allocation percentage in fixed income, with the balance in “risk assets” such as equity index ETFs, and real estate index ETFs (REIT indexes). ETFs are exchange-traded funds, which are typically index funds that trade like stocks.
Using this approach, a 30-year old would have a “Growth” risk profile with 30% in fixed income and 70% in risk assets. A 50-year old would have an “Income & Growth” risk profile with 50% in fixed income and 50% in risk assets. Lastly, a 70-year old would have an “Income” risk profile, with 70% in fixed income and 30% in risk assets.
Efficient Annual Rebalancing
To maximize efficiency, individuals can allocate their incremental investment savings each year to help rebalance their portfolio towards the Growth investable benchmark up to the age of 40, Income & Growth between the ages of 40 and 60, and Income for those 60 and older.
The main difference between the investable benchmarks is the percentage of fixed income to risk assets, which determines the expectation for risk and return long-term. Typically, the Income investable benchmark will deliver lower risk than the Growth portfolio, with a lower expectation for total return. However, this past decade, Income outperformed Growth.
The Bottom Line
Swensen has the best credentials for an institutional portfolio manager who can give you the optimal asset allocation for a core investment portfolio. His prescription for an efficient multi-asset class portfolio of leading ETFs is a great starting point for all investors.
To learn more, contact ETF PM today.