Investing - Asset Allocation - Part 5

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

Editor's Note: This post was published as Editor's Choice at Carnival of Investing #63.

[Continued from Investing - Asset Allocation - Part 4]

Static Models of Asset Allocation

In part 1 we have discussed the basics of asset allocation along with 2 very useful and interactive asset allocation calculators. We described the models from Fidelity and Charles Schwab in part 2. Etrade was the main focus in part 3 and in part 4 the models from Vanguard were studied. In this post of this mini series we shall explore the last of the static models of asset allocation from American Funds.

5. American Funds: Their models are somewhat unique with respect to the previous ones that we have studied. American Fund's asset allocation prototypes have split the stocks portion into two classes namely Growth and Growth and Income. This is somewhat non-traditional. Later an immensely valuable chart has been provided that compares the performance of the suggested asset allocation models over a 30 year period from 1976-2005.

High-growth investment mix

Growth: 70%. Growth and income: 20%. Bond: 5%. Cash equivalents: 5%.

Moderate-growth investment mix

Growth: 45%. Growth and income 25%. Bond: 20%. Cash equivalents: 10%.

Balanced investment mix

Growth: 25%. Growth and income: 25%. Bond: 25%. Cash equivalents: 25%.

Conservative investment mix

Growth: 0%. Growth and income: 30%. Bond: 40%. Cash equivalents: 30%.

Capital-preservation investment mix

Growth:0%. Growth and income: 0%. Bond: 50%. Cash equivalents: 50%.

Returns for five asset allocation models

The following assumptions have been made for the chart given below.
  • Hypothetical investments of $2,400 were made annually for a period of 30 years from 1976-2005. So the total amount contributed to each model over 30 years is $72,000.
  • Annually the portfolios have been rebalanced once.
  • Inflation has not been taken into account.
It is very interesting to note that the jump in average annual return from Balanced model to Moderate growth model is 0.9% with the worst 5 year return going down from -0.2% to -3.5%. Whereas the jump in average annual return from Moderate growth model to High growth model is mere 0.3% with the worst 5 year return going down from -3.5% to -8.1%! We feel that it does not make sense to take on the significant additional risk associated with the High growth model in lieu of such paltry increase in (expected) returns.

High growth Moderate growth Balanced Conservative Capital preservation
Ending value $542,977 $508,850 $422,736 $378,516 $277,183
Average annual total return 11.1% 10.8% 9.9% 9.3% 7.7%
Best 5-year return 22.5%
Worst 5-year return -8.1%
Years returns were up 22 years
out of 30
23 years
out of 30
27 years
out of 30
29 years
out of 30
28 years
out of 30
Years returns were down 8 years
out of 30
7 years
out of 30
3 years
out of 30
1 year
out of 30
2 years
out of 30
We shall conclude this mini series in the next post with key points to be considered during asset allocation.

Please feel free to share with us your interesting experiences regarding asset allocation such as which tools you used, which model did you choose and key points rest of us should be careful about.

[Continued to Investing - Asset Allocation - Conclusion]

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