Top 5 Asset Allocation Strategies

“Wide diversification is only required when investors do not understand what they are doing.” – Warren Buffett

Probably the single most common incorrect quote in investing is: “Asset allocation determines 94% of your investment returns.” The quote refers to a study1 that is misquoted by both the investment industry to market simple investment strategies and by the index industry to downplay fund manager skill.

“Asset allocation” attempts to balance risk and return by adjusting the mix between equities (stocks), bonds and cash. While the benefits are far less than touted, it is an objective and simple way to help investors understand both the risk level and return potential of their portfolio.

There is a common belief that it is just a matter of deciding whether you are more comfortable with the classic mix of 60% stocks/40% bonds or a more growth-oriented 80%/20% mix. However, there are actually a variety of asset allocation strategies.

Here are 5 possible strategies. All are reasonable and based on studies. The best strategy for you depends on multiple factors, including your risk tolerance, time horizon and your long term goals, especially your retirement goal.

1. Fixed Allocation

This is the traditional method. It is based on your risk tolerance. After filling out a “risk tolerance questionnaire” and based on the degree of ups and downs you can tolerate in your investments, you choose an allocation, say 70% stocks/30% bonds. You generally maintain the same allocation through your life, unless your risk tolerance changes.


  • Investments should be suitable to your risk tolerance. Most investors are not very knowledgeable about investing and this allows them to have a constant level of ups and downs that they can get comfortable with.
  • Easy for you to understand the risk and return level of your investments.


  • Risk tolerance for most people changes based on the situation. In great bull markets, most investors become more aggressive, while in scary bear markets most investors become more cautious.
  • You may end up with a portfolio that is too conservative when you are young and too aggressive when you are old.
  • Many investors end up with a portfolio too conservative to have any chance at all of having the retirement they want because they base their investments only on their risk tolerance, without knowing what return they need to achieve their life goals.

2. Target Date

This method is based on the “birthday theory” that you should become more cautious as you get older. The formula used is usually something like: 110 – your age = % in stocks. At age 30, you should have 80% in stocks and at age 60 that should have 50%. There are target date mutual funds that do the adjustment for you automatically each year.


  • Automatically adjusts for the shorter time horizons and more conservative nature that is common as you get older.
  • Reduces risk as your portfolio gets larger with time. A 20% decline on a $1 million portfolio at age 60 may be harder to tolerate than a 20% decline on a $50,000 portfolio at age 30.


  • Many people become comfortable with the ups and downs of their investments, so they may not want more conservative investments every year.
  • With more experience, not all investors become more conservative with age.
  • You may end up with a portfolio too conservative to have any chance of having the retirement you want.

3. Lifecycle Investing

Based on an in-depth study by two Yale professors2, they proved that retirement risk over your lifetime is lower if you “diversify across time”. Traditional asset allocation does not give you much growth when you are young and have a long time horizon with a relatively small portfolio.

Traditional investing also creates a big “last decade risk” because 80% of your investments over your working life are usually after age 50. If your last decade is a bad decade (like the 2000-09 decade), it probably means your rate of return for your entire working life is low. One bad decade can put you far below your retirement goal.

Lifecycle investing reduces “last decade risk” by diversifying across time. Essentially, you borrow to at least double the size of your investments in your first decade of investing and invest 100% in stocks. If you have $50,000, you borrow another $50,000, so you can invest $100,000 all in stocks. That means you essentially have 200% in stocks.3 Then you slowly pay off the leverage by your early 50s, when you start adding bonds, moving to your desired mix by retirement.

The study (and book) by two Yale professors proved lifecycle investing for your entire working life provided a better retirement 99-100% of the time.  For more details, check out the full article on Lifecyle Investing.


  • Provides a better retirement income than traditional asset allocation 99-100% of the time (based on the study).
  • Offers more growth potential when you are young and have a long time horizon.
  • Reduces “last decade risk” that one bad decade can mess up your retirement.


  • Borrowing to invest in your 20s and 30s is a riskier strategy at a time when you may not be experienced.
  • Borrowing to invest may magnify the bad investing behavior of most investors, who tend to “buy high” when there is a lot of good news and “sell low” by converting to more conservative investments when news stories are mostly negative.

4. Stocks for the Long Run

Investing seems to arbitrarily focus on 1-year returns, even though most investors will be invested for at least 30 years. In the investing bible “Stocks for the Long Run”, Prof. Jeremy Siegel proved that over long periods of time, stocks always produce higher returns and are more consistent than bonds. If your time horizon is more than 30 years, then stocks have historically beaten bonds 100% of the time.

His study shows that for investors with a 30-year time horizon, ultraconservative investors (least risk) should have 71% stocks, moderate investors 116% stocks (by borrowing), and aggressive investors 139% stocks.

One of my mentors, Nick Murray, worded it well – the long term return of stocks has been 10%/year, bonds 6%/year and cash 2%/year. How many 10%s vs. 6%s vs. 2%s do you want in your portfolio?

When you look at 30-year periods (instead of 1-year periods), the returns of stocks has been more reliable and consistent than bonds. This is because the return on bonds is highly susceptible to inflation. The worst 30-year period ever for the S&P500 since 1871 was a gain of 5.09%/year4, which would more than quadruple your money. After inflation, the worst 30-year period for stocks was +2.6%/year, while for bonds it was a loss of -2.0%/year.5

Many major countries have had their government bonds go to zero (or near zero) in the last century, including Germany, Italy, Japan, Russia and Brazil, but the stock market has always recovered in every country.4

The underlying theory is that stock markets are based on large companies that are able to adjust their businesses to keep raising their profits over time. They have many tools, including raising prices, getting new clients, introducing new products, expanding into new markets, cutting costs or buying competitors. As long as companies continue to increase profits over time, the stock market eventually goes up.


  • Provides a much better retirement for investors with long time horizons that are able to tolerate the ups and downs.
  • Easy to understand and based on research.
  • Avoids the most common investing error of switching to more bonds at the bottom of the market.


  • Most investors think short term, even if their time horizon is long.
  • Many investors are not able to tolerate the ups and downs of the stock markets.
  • Investing only in stocks may magnify the bad investing behavior of most investors, who tend to “buy high” when there is a lot of good news and “sell low” by converting to more conservative investments when news stories are mostly negative. The average investor makes 6-7%/year less than the investments they own because of bad market timing.7

5. Rempel Maximum

This is the strategy for people that want to build serious wealth – borrowing to invest for the long term.8 Borrowing to invest magnifies gains and losses, but the stock market has never had a loss for a 15-year period or longer.4 Borrowing to invest is a risky strategy, but the risks are far lower if you invest long term. The interest on an investment loan is normally tax deductible as well.  Details about the Rempel Maximum here.

It is the logical extension of “Stocks for the long run”. Long term, stocks have consistently outperformed both bonds and the cost of borrowing to invest.4 Leverage is the strategy used by nearly all wealthy people, who use “other people’s money” to invest in their business or in the stock market (many businesses), including 87% of the Forbes 400 richest people.9

The amount borrowed to invest can range widely and depends on many factors. Often the intent is to borrow the maximum amount that you can support long term.


  • Can build significant wealth and the security that comes from having a huge nest egg.
  • Provides a much better retirement for investors with long time horizons that are able to tolerate the ups and downs – significantly higher than “stocks for the long run”.
  • Avoids the most common investing error of switching to more bonds at the bottom of the market.
  • Interest payments are fully tax-deductible every year, while tax on the growth of the investments can be deferred until you sell them far in the future if you have tax-efficient investments.


  • Too risky of a strategy for most people who may not be able to stomach significant down periods, especially if the investments drop below the value of the amount borrowed.
  • Most investors think short term, even if their time horizon is long.
  • Borrowing to invest may magnify the bad investing behavior of most investors, who tend to “buy high” when there is a lot of good news and “sell low” by converting to more conservative investments when news stories are mostly negative.

The best strategy for you depends on multiple factors, including your risk tolerance, time horizon and your long term goals, especially your retirement goal.

Story of Jim and Jennifer

Jim and Jennifer are 35 and make a good income. They want to retire comfortably a bit early at age 60. They are deciding on their asset allocation. Consider the following:

  1. Goal: They sat down with us and created a detailed, line-by-line retirement lifestyle that they want. In order to make it given how much they can afford to invest, their investments will need to average 8%/year long term. That means they would have to invest 100% in equities to make their goal.
  2. Gut feel: They are thinking of investing with a balanced 50%/50% allocation because they are a bit nervous with the difficult markets recently.
  3. Risk tolerance: A discussion of their risk tolerance and a questionnaire show they can tolerate the level of ups and downs of the stock market.
  4. Market crash: They said that in a big market crash, they would invest more to buy low.
  5. Time horizon: Even though they plan to retire in 25 years, their time horizon is closer to 50 years, including after they retire.

Here are possible allocations based on these 5 strategies:

  1. Fixed allocation: 70% stocks/30% bonds. (They are young and have a relatively high risk tolerance, but are a bit nervous.)
  2. Target date: 75% stocks/25% bonds. (Formula is 110- age 35 = 75% stocks.)
  3. Lifecycle investing: 200% stocks/-100% bonds. (Borrow to double their investments at their age. Count the loan as a negative bond holding.)
  4. Stocks for the Long Run: 100% stocks/0% bonds.
  5. Rempel Maximum: 400% stocks/-300% bonds. (Just an example using a 3:1 investment loan.)

What strategy should Jim and Jennifer use?  Which asset allocation strategy is best for you?

About the Author: Ed Rempel is a Certified Financial Planner (CFP) and Certified Management Accountant (CMA) who built his practice by providing his clients solid, comprehensive financial plans and personal coaching.  If you would like to contact Ed, you can leave a comment in this post, or visit his website  You can read his other articles here.

1 Brinson, Hood, and Beebower (1986, 1991) The study actual shows that 40% of the difference in return between different balanced funds was explained by the asset allocation.
2 “Lifecycle Investing”, Ian Ayres and Barry Nalebuff
3 If you count the investment loan as a negative bond position, then you are investing 200% stocks/-100% bonds in your first decade.
4 Standard & Poor’s
5 “Stocks for the Long Run”, 4th edition, Jeremy Siegel
6 The only exception I am aware of is Russia when it converted to communism and the government seized many companies. This is a political reason, not an investment reason for a stock market collapse.
7 “Quantitative Analysis of Investor Behavior 2011”, Dalbar
8 Borrowing to invest for the long term is essentially a negative bond allocation.
9 “The Forbes 400 – The richest people in America”

“Disclaimer: Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Opinions expressed are the personal opinion of Ed Rempel.”


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Ed Rempel

Ed Rempel is a Certified Financial Planner (CFP) and Certified Management Accountant (CMA) who built his practice by providing his clients solid, comprehensive financial plans and personal coaching.

Ed has written numerous articles to educate the public and his clients on his unique insights into strategies that actually work, instead of the “conventional wisdom” common in the financial industry.

Ed has trained more than 200 financial advisors and is considered the Smith Manoeuvre expert in the Toronto area. He has received accolades from Frasier Smith in his book “The Smith Manoeuvre” for customizing this strategy for hundreds of clients. His extensive experience in tax and finance has placed him in high demand. Ed’s team collaborates on each of their clients to help them create financial security and freedom.
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7 years ago

The ultra-wealthy Tiger21 members allocate their assets as such:

Hedge 9%
Cash 10%
Fixed 15%
RE 21%
Public Equity 23%
Private Equity 20%

Since 2008, this diversified group of rich people has doubled their Private Equity holdings and decreased their Public Equity holdings by 10% (all other sectors remained fairly stable).

Still think you need to be “fully invested” 100% in public equities?

This diverse group of rich people didn’t amass their $95 million (average) buying mutual funds.

Don’t believe the hype and get closer to the profit!

Ed Rempel
7 years ago

Hi Rich,

Interesting to associate it with life events. I’m not sure this would work as well in practice as it sounds, though.

There are a lot of ideas that sound good in your head but don’t really when you do the math, and I think this is like that. I have a few issues with this method.

Your figures are just an example, but you end up only 70-75% equities for your main growth years from age 30-55. A higher equity allocation for these 25 years should give you quite a bit more in retirement.

Then going to 90% equities for only 5 years from 55-60 and then back to 75% equities would be a risky, shorter-term bet.

It seems to me that you are using the cash/bond allocation for your emergency fund. Perhaps it would be better to establish a proper emergency fund of, say, 3-6 months’ expenses either in cash or an available credit line, and then maintain a higher equity allocation for the long run.

The amount you are holding in cash for possible life events would grow exponentially as your portfolio grows. For example, at age 30, your portfolio may be $50,000, but at age 50, it could be $500,000. Having 30% in cash of your $500,000 is a lot.

You would also run the risk of having your emotional market view affect your allocation. There is not a formula. The allocation depends on your opinion of your possible cash needs in the next few years, which is very subjective.

Don’t you think you would be better off creating a proper emergency fund and then investing long term with a high equity allocation based on your risk tolerance?


7 years ago

I recently read about a sixth strategy that is somewhat different than the five mentioned in Ed’s article. In this strategy you place all of your investments in a diversified set of stocks that you will not require for the next 7 years (or 10 years if that suits you better) and the rest goes into fixed income liquid investments. The idea of 7-10 years being that the market normally recovers by the time you need the money from the stocks.

With this strategy you would invest 100% stocks when you are 20 because you will not need any of that money in the next 7 years. When you are 30 and buy a house and have children you may want to back off to 75% stocks so that in case of unemployment or other setbacks you still have a cash-cushion to prevent you from losing your house or having to sell stocks at a bad time. If you are 45 and have a big mortgage and children starting to enter college you may go to 70% stocks to cover the large obligations you have going. By 55 your mortgage is paid off and children graduated so you go back to 90% because you plan on retiring at 60 and you only need a little cushion for the first few years of retirement. As you approach 60 you reduce your stock allocation according to your years-to-retirement number. Even when you retire you may still end up with 75% stocks because 25% would cover you for the next 7 years. The numbers are just examples because everyone will have different values depending on the size of their portfolio and obligations.

There are several things I like about this strategy. You can have a fairly high percentage of stocks while still being sure that you have enough in liquidity to cover your costs in case of financial setbacks so you can relax about market fluctuations and not do anything stupid like sell low and buy high. You really only have to adjust things about once per year and this is a good time to plan your next 7 financial years. You can make it simple by investing in low management expense ratio exchange traded funds; I pay around 0.25% MER for my ETFs and it only takes me a few hours to readjust the portfolio. You can tailor the plan to suit your financial needs and not rely on some questionable financial risk test that is dependent on your mood that day to determine your stock allocation. You are unlikely to be stuck in a situation where you go bankrupt, lose your house or are stuck with a big loan that causes great personal pain to you and your family.

It is a very steady and simple approach that makes you wealthy in the 20-25 year time frame but experience has proven to me that this is the best way because you grow with your money and are less likely to lose it that way.

Ed Rempel
8 years ago

Hi All,

Let me see if I can bring this back to what is applicable to the average person.

The reason that stocks are the most appropriate investment for most people to build their wealth is that stocks have consistently returned a good return and protected purchasing power over the long run.

This chart by Prof. Jeremy Siegel is fascinating. It shows returns from 1802-2010 comparing asset classes after inflation:

Note that with everything that has happened in the last 200 years, stocks were always able to adjust and continue to grow. The reason for this is that the stock market is made of a bunch of large companies that are able to change their operations to continue making money.

Companies have many ways to do this, such as getting new customers, changing products, cost cutting, buying other companies, becoming more efficient, etc. Individual companies go under, but the stock market as a whole has always continued to grow long term.

The surprising fact from this chart is that the 200-year trend line for stocks is drawn with a ruler, which cannot be done with other types of investments. Bonds are considered to be lower risk, which is true over shorter time periods, but not true over 30-year periods or more. Bonds get killed in high inflation environments and stocks have beaten bonds 100% of 30-year periods.

That is part of what this article is about. There are different asset allocation strategies. The longer your time horizon and the more you are able to stay invested through down periods, the more equities are appropriate for you – up to and including leverage which is an allocation over 100%.

For more conservative investors with shorter time periods, the first 2 or 3 strategies are more appropriate.

In the vast majority of cases, at least some allocation to the stock market makes sense. The chart from Prof. Siegel shows the logic for this clearly.


8 years ago

As I was saying….

Art: a $64 Billion market.

All of it not worth a penny! LOL!
AAPL on the other hand…

8 years ago

@VI: Agreed.
Guess that’s why Buffett is giving away 99% of his wealth to charity.

But for the rest of us mere money mortals who don’t possess the dollar clout to influence government policy or corporate strategy…the best we can do to create a better world to live in is to create better descendants. What better asset allocation than that.

Value Indexer
8 years ago

If you truly aren’t concerned about anything that you will personally see, giving your descendants a better world to live in and not just a bigger castle to hide in seems like a pretty good investment.

8 years ago

Ah, another fallacy: “I don’t cherry-pick equities. I buy broad index funds.”

Are you buying ALL global index funds? Or SPECIFIC funds?

Please give me an example of a person who became rich through holding (NOT TRADING) ONLY equities. Remember, only 1-2% of North Americans have a minimum net worth of a million dollars. And if you could also provide an example of a rich person holding ONLY equities. Or an example of an equity (ie. stock) which has endured more than one century.

That’s what I thought.

I explain again — because you simply can’t understand the concept of wealth — if you want your financial legacy to last past your own funeral, best to have a look around at other venues in which to park your money: gold, land, fine art.

Good luck to you. :)

Andrew F
8 years ago

No, I don’t cherry-pick equities. I buy broad index funds. You can’t do that with land or art. You have to cherry pick. And most of the time you are not picking a Van Gogh or Manhattan pre-rapid price appreciation.

I ask again: please give me an example of a rich person who became rich through holding (not trading) gold, land, or art.

That’s what I thought.

8 years ago

I guess poor people will continually focus on cash-flow (and incorrect financial verbiage). The rich adopt a different mind-set, and it shows.

As for the claim of cherry picking…isn’t that what YOU do with YOUR equities??? Or do you just buy them ALL and hope for a good return on your speculation?

The stocks I picked were not microcap nothings, they were giant companies which had, as you put it “practical usefulness” — and they failed spectacularly. When has gold ever been reduced to $0 in the last 8,000 years?

I’ll repeat, since you seem to have missed it: point being, if you want your financial legacy to last past your own funeral, best to have a look around at other venues in which to park your money — gold, land, fine art.

Regardless of your opinion, it is a reality that the rich hold these assets allocations, and it has obviously worked for centuries. It’s a bit foolish to argue money management with generational wealth.