Investing - Asset Allocation - Part 2

[This post is written and copyrighted by FIRE Finance (]

Editor's Note: This post was published at the Carnival Of Personal Finance #89 where we were represented by the celebrity shown on the left. Just for fun, can you guess who she is? Leave your answer in the comments section :).

[Continued from Investing - Asset Allocation - Part 1]

Static Models of Asset Allocation

In an earlier post we have familiarized ourselves with the basics of asset allocation along with 2 very useful and interactive asset allocation calculators. We shall now explore different static models of asset allocation. There are numerous sources scattered on the web offering a know-how about the various models of asset allocations. After studying many of them we found that the models from Fidelity, Charles Schwab, Etrade, Vanguard and American Funds are comprehensive and reliable.

1. Fidelity:
The static asset allocation models from Fidelity is shown in Figure 1. We noticed that Fidelity's chart has a neat feature of depicting the highest, lowest and average historical annualized returns for the suggested allocation models. This feature gives us an idea about the difference in annual returns that our assets would earn over an extended period if we switched our models.

A brief glance over the data shows that the historical annual average return of their "Aggressive Growth" model is 9.91% whereas that of the "Conservative" model is 6.14%.

It is to be remembered that we have to shoulder additional responsibility and a stomach for greater losses (as well as gains) if we decide to opt for aggressive models of asset allocation. Before doing that it would be wise to reflect and analyze whether the extra risk is worth the gain. The highest and lowest 12-Month return gives an idea of the type of roller coaster rides we will have with our assets for each model.

Figure 1. Fidelity's Asset Allocation Models

2. Charles Schwab: Figure 2 shows Schwab's five models of asset allocation namely, Aggressive, Moderately Aggressive, Moderate, Moderately Conservative and Conservative. In our opinion, their Aggressive Model is very aggressive because it has 95% of the assets in stocks (which have the highest volatility). On the other hand their Moderately Aggressive model with 80% in stocks, 15% in bonds and 5% in cash is more palatable to our tastes. We feel that this model is suitable for investors who have at least 25 years of investing ahead of them before they retire. Rest of the models successively decrease the risk which results in reducing the potential for appreciation or returns.

Figure 2. Charles Schwab's Asset Allocation Models

Comparing Figure 2 with Figure 1 we see that since Charles Schwab's charts do not depict the historical annual average rate of return or the highest and lowest returns in 12 months for the five models, it is difficult to get a feel of how the assets in particular model would perform. So far as presentation is concerned Fidelity scores over Charles Schwab.

In the next part of this series we shall cover quite a few interesting static models of asset allocation from Etrade, Vanguard and American Funds.

[Continued to Investing - Asset Allocation - Part 3]

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