Model Portfolios
Model portfolio allocations for different risk profiles and investment goals.
Model portfolios are pre-constructed investment portfolios designed to help investors achieve their financial goals based on their risk tolerance, time horizon, and investment objectives. These portfolios provide a ready-made asset allocation strategy, eliminating the need for investors to research and select individual investments.
Overview
Model portfolios combine different asset classes (stocks, bonds, cash, etc.) in specific proportions to create diversified investment strategies. Each model portfolio is designed for a particular investor profile, balancing the trade-off between potential returns and risk tolerance.
Model Portfolios
| Portfolio | Stocks | Bonds | Short-Term | Cash | |||||
|---|---|---|---|---|---|---|---|---|---|
US Broad Market | Developed ex-U.S. | Emerging Markets | U.S. Aggregate | International Aggregate | U.S. TIPS | T-Bills (0–3M) | Treasury 1–3 Year | Bank | |
| Aggressive Growth | 50% | 25% | 10% | 5% | 3% | 2% | 3% | 2% | 0% |
| Growth | 40% | 20% | 8% | 12% | 8% | 5% | 4% | 3% | 0% |
| Balanced | 30% | 15% | 5% | 20% | 12% | 8% | 5% | 3% | 2% |
| Conservative | 20% | 10% | 3% | 28% | 15% | 12% | 7% | 3% | 2% |
| Income | 10% | 5% | 2% | 35% | 20% | 15% | 8% | 3% | 2% |
Model Portfolio Returns
| Asset Class | Dividend Yield | CAGR-Price | Arithmetic Mean-Price | Standard Deviation-Price | Stock/Bond Cross-Correlation |
|---|---|---|---|---|---|
| Stock-Returns | 2.3% | 7.1% | 8.5% | 16.4% | 0.3016 |
| Bond-Returns | 3.5% | 1.0% | 4.5% | 4.2% | 0.3016 |
| Short-Term Returns | 2.5% | 0.0% | N/A | N/A | N/A |
| Cash-Returns | 0.1% | 0.0% |
Understanding Risk and Return
Risk Tolerance Spectrum
- Conservative: Prioritizes capital preservation, accepts lower returns
- Moderate: Balanced approach seeking growth with some stability
- Aggressive: Seeks maximum growth, accepts higher volatility
Time Horizon Considerations
- Short-Term (1-3 years): Conservative portfolios recommended
- Medium-Term (3-10 years): Moderate portfolios appropriate
- Long-Term (10+ years): Aggressive portfolios can be suitable
Asset Allocation Principles
Model portfolios follow core investment principles:
Diversification
- Spread investments across multiple asset classes
- Reduce risk through variety
- Avoid concentration in single investments
Rebalancing
- Periodic adjustment to maintain target allocation
- Sell winners, buy underperformers
- Maintains risk profile over time
Cost Management
- Focus on low-cost investment vehicles
- Minimize fees and expenses
- Use index funds and ETFs when possible
Benefits of Model Portfolios
For New Investors
- Simplicity: Ready-made investment strategy
- Education: Learn about asset allocation
- Confidence: Professional portfolio construction
- Time Savings: No need for extensive research
For All Investors
- Diversification: Built-in risk management
- Discipline: Prevents emotional decision-making
- Consistency: Maintains strategy over time
- Professional Approach: Based on investment best practices
Choosing the Right Portfolio
Consider these factors when selecting a model portfolio:
- Risk Tolerance: How comfortable are you with volatility?
- Time Horizon: When will you need the money?
- Financial Goals: What are you investing for?
- Current Situation: Age, income, and financial obligations
- Investment Experience: Comfort level with investing
Implementation
Model portfolios can be implemented through:
- Target-Date Funds: Automatically adjust over time
- Robo-Advisors: Automated portfolio management
- Index Funds: Low-cost broad market exposure
- ETFs: Flexible, low-cost investment vehicles
- Mutual Funds: Professionally managed portfolios
Monitoring and Adjusting
While model portfolios provide structure, they should be:
- Reviewed Annually: Ensure alignment with goals
- Rebalanced Periodically: Maintain target allocation
- Adjusted for Life Changes: Update as circumstances change
- Evaluated for Performance: Compare to benchmarks
Model portfolios offer a structured approach to investing, helping investors build diversified portfolios aligned with their risk tolerance and financial goals.