The Fundamentals of Asset Allocation for Long-Term Investors
Why the mix of stocks, bonds, and other assets is typically the most important determinant of portfolio risk and return over time.
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Decades of research and practical experience confirm that asset allocation—the division of a portfolio among major asset classes—explains the majority of the variation in portfolio returns over long periods. For clients of asset management firms, getting the allocation right is more consequential than the selection of individual securities within each class.
Equity-to-Fixed-Income Framework
A traditional starting framework is the equity-to-fixed-income ratio, often guided by time horizon and risk tolerance. Younger investors with decades until retirement can generally sustain higher equity allocations (70–90%) because they have time to recover from market declines and benefit from compounding. Investors nearer to or in retirement typically reduce equity exposure to manage sequence-of-returns risk, though many maintain meaningful equity holdings (40–60%) for long-term growth and inflation protection.
Diversification Within Asset Classes
Within equities, further diversification across U.S., international developed, and emerging markets, as well as across market-capitalization and style factors, improves resilience. Within fixed income, a mix of government, investment-grade corporate, and possibly inflation-protected securities balances income, stability, and inflation sensitivity.
Adding Alternatives and Rebalancing
Alternative assets and real assets can be added as satellite holdings to improve diversification, subject to liquidity needs and sophistication. The precise targets should reflect the client’s unique circumstances, goals, and behavioral capacity to stay invested during volatility.
Asset allocation is not static. Life events, changes in market valuations, and evolving goals warrant periodic review. A disciplined rebalancing policy—whether calendar-based or threshold-based—helps maintain the intended risk profile and can add modest return through the “buy low, sell high” effect of rebalancing.
An asset management firm translates these principles into a personalized Investment Policy Statement that guides day-to-day decisions and provides a reference point during turbulent markets.
Investing risk disclosure
Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money. Before investing, consider the funds’ investment objectives, risks, charges, and expenses. Contact Mahoney Asset Management for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.
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