70/30 vs. 80/20 Asset Allocation: Which Is Better? - SmartAsset (2024)

70/30 vs. 80/20 Asset Allocation: Which Is Better? - SmartAsset (1)

Choosing the right asset allocation matters for managing portfolio risk and reaching investment goals. One of the simplest strategies for setting asset allocation is to use a percentage split, such as 70/30 or 80/20. Either one has you investing the majority of your money in stocks with the rest going to safer investments, such as cash and bonds. At first glance, they appear similar but choosing a 70/30 vs. 80/20 asset allocation can impact your investment goals and outcomes.

A financial advisor could help you create a financial plan for your investment needs and goals.

70/30 Portfolio Basics

A 70/30 portfolio allocates 70% of your investment dollars to stocks and 30% to fixed income. So an investor who uses this strategy might have 70% of their money invested in individual stocks, equity-focused actively or passively managed mutual funds and equity-focused index or exchange-traded funds (ETFs). The remaining 30% of their portfolio would be allocated to bonds, cash and cash equivalents.

The 70/30 portfolio is sometimes seen as a replacement for the 60/40 asset allocation model. With a 60/40 portfolio, 60% of assets are allocated to stocks while 40% are allocated to bonds. A 70/30 portfolio generally entails more risk than a 60/40 split as there’s a larger allocation to stocks.

However, still have a decent amount of bonds and other fixed-income investments to balance out market volatility. Choosing a 70/30 portfolio could also make sense if you’re worried that a 60/40 asset allocation might be too conservative for your needs and goals.

80/20 Portfolio Basics

An 80/20 portfolio operates along the same lines as a 70/30 portfolio, only you’re allocating 80% of assets to stocks and 20% to fixed income. Again, the stock portion of an 80/20 portfolio could be held in individual stocks or a mix of equity mutual funds and ETFs.

With an 80/20 portfolio, the risk factor increases since you have more money going into stocks. The flip side of that, however, is that you may have more room to earn higher returns. While bonds can provide consistent income, returns are generally not on the same level as stocks.

Comparing 70/30 vs. 80/20 Asset Allocation

70/30 vs. 80/20 Asset Allocation: Which Is Better? - SmartAsset (2)

The main difference between the 70/30 and 80/20 asset allocation models is how much risk you’re taking. With an 80/20 allocation, you’re devoting a larger share of your money to stocks, which can mean greater exposure to stock market volatility. Whether it makes sense to choose a 70/30 asset allocation over the 80/20 portfolio can depend largely on three things:

  • How much growth do you need and want to achieve in your portfolio
  • Your personal tolerance for risk
  • Your timeline for investing

One of the most important things to understand when choosing an asset allocation is how much the money you invest needs to grow. If you want to retire at 65 with $2 million saved and you’re starting at age 40, for example, your portfolio is going to need to work a lot harder than someone who’s starting to save at age 25.

There’s also a correlation between your risk tolerance and risk capacity. Risk tolerance is the amount of risk you’re comfortable taking with your investments. In theory, the younger you are and the longer you have to invest, the more risk you can afford to take. That’s because you have longer to recover from market downturns, assuming you’re not planning an early retirement.

Risk capacity is the amount of risk you need to take in order to achieve your investment goals. This is perhaps even more important than risk tolerance for determining whether to choose a 70/30 vs 80/20 asset allocation or a completely different percentage mix.

When you choose an asset allocation that aligns with your risk tolerance but not your risk capacity, you could potentially hinder your investment goals. If you’re not investing aggressively enough, for example, you may not see the returns you’re hoping for. This could mean having less money to live on in retirement.

On the other hand, investing beyond your risk profile could set you up for greater losses. If you’re taking more risk than you really need to, you could lose money and again, the end result may be having less saved for retirement.

How to Choose the Right Asset Allocation by Age

When considering how to allocate assets by age, whether you’re weighing a 70/30 vs. 80/20 asset allocation or something else, it helps to look at the historical returns and your personal timeline for investing. The stock market moves in cycles and there are inevitably periods where stocks perform better than others.

Looking at historical returns can give you perspective on how a particular asset allocation strategy has performed over time. Past performance is no guarantee of future results, but it can give you an idea of what level of returns you’re likely to see in your portfolio over time.

As you get closer to retirement, it’s natural to make a shift toward more conservative investments. If you’re using the 70/30 or 80/20 model, for example, those might flip in retirement. So you might invest 30% or 20% in stocks in your 60s and beyond while allocating the remaining 70% or 80% to fixed income.

You can also use a different age-based rule for determining your ideal asset allocation. The Rule of 120, for example, suggests subtracting your current age from 120 to figure out how much of your portfolio to allocate to stocks vs. bonds. So if you’re 30, for example, you’d subtract that from 110 to get 90. This is how much of your portfolio you’d devote to stocks.

The Rule of 120 assumes that you’ll have a longer life expectancy, which means your money will need to last longer in retirement. As with other rules, however, it’s important to tailor it to both your risk tolerance and risk capacity. If keeping 90% of your portfolio in stocks feels too risky, then you might use 110 as your base number for calculations instead.

Talking to your financial advisor can help you to decide which asset allocation model makes the most sense. Your advisor can also help you develop a strategy for shifting that allocation over time as you move through different life stages and get closer to retirement.

Bottom Line

70/30 vs. 80/20 Asset Allocation: Which Is Better? - SmartAsset (3)

Whether you choose a 70/30 or 80/20 asset allocation, it’s important to know what you own and how much you’re paying for it. If you own several mutual funds, for example, be aware of whether those funds hold any of the same stocks. Having significant overlap could actually reduce diversification rather than increase it and potentially expose you to more risk. And paying steep expense ratios could detract from your overall returns.

Investing Tips for Beginners

  • A financial advisor could help you figure out the right asset allocation for your financial needs and goals. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • While the 4% Rule is the traditional benchmark for determining retirement withdrawals, that rule may not fit your needs. depending on the type of lifestyle you hope to enjoy.SmartAsset’s retirement calculator can help you plan your investing and saving strategy.
  • If you need help picking an asset profile,SmartAsset’s free asset allocation calculator will assist you in picking a profile to help align your portfolio allocation with your risk tolerance.

Photo credit: ©iStock.com/Adene Sanchez,©iStock.com/fizkes, ©iStock.com/fizkes

70/30 vs. 80/20 Asset Allocation: Which Is Better? - SmartAsset (2024)

FAQs

70/30 vs. 80/20 Asset Allocation: Which Is Better? - SmartAsset? ›

Comparing 70/30 vs. 80/20 Asset Allocation. The main difference between the 70/30 and 80/20 asset allocation models is how much risk you're taking. With an 80/20 allocation, you're devoting a larger share of your money to stocks, which can mean greater exposure to stock market volatility.

Which is better, 70/30 or 80/20? ›

So you'll find that most health plans with 70/30 coinsurance have lower premiums than an 80/20 plan. So, if you're mostly healthy and have a good emergency fund in place, it might be a good idea to look for a health plan with higher coinsurance.

Is 70/30 a good asset allocation? ›

The 30% exposure to bonds buffers the risk of 70% equity exposure to some extent, besides providing stable returns. While asset allocation is generally governed by various factors including demographics and economics, the 70/30 rule may serve as a good starting point for most investors.

Is 80 20 a good asset allocation? ›

It is suitable for investors with a high risk tolerance who are seeking substantial returns and can withstand large drawdowns. It's exposed for 80% on the Stock Market. In the last 30 Years, the Stocks/Bonds 80/20 Portfolio obtained a 9.50% compound annual return, with a 12.53% standard deviation.

What is the best asset allocation ratio? ›

If you are a moderate-risk investor, it's best to start with a 60-30-10 or 70-20-10 allocation. Those of you who have a 60-40 allocation can also add a touch of gold to their portfolios for better diversification. If you are conservative, then 50-40-10 or 50-30-20 is a good way to start off on your investment journey.

What are the flaws of the 80-20 rule? ›

Disadvantages of using the 80/20 rule

The 20 and 80% numbers don't refer to the amount of effort you're putting in, but the causes and consequences you're working on. The goal is not to minimize the amount of effort, but to focus your effort on a specific portion of work to create a bigger impact.

Does 80-20 actually work? ›

Can you lose weight following the 80/20 rule? Following the 80/20 rule could help you lose weight. But, how much weight you lose depends on how healthy or unhealthy your eating habits were before you started 80/20. Portion control and moderation are the keys to success when eating 80/20.

What is the Warren Buffett 70/30 rule? ›

A 70/30 portfolio is an investment portfolio where 70% of investment capital is allocated to stocks and 30% to fixed-income securities, primarily bonds.

What does Warren Buffett recommend now? ›

Instead, he has regularly advised investors to periodically purchase shares of an index fund that tracks the S&P 500 (SNPINDEX: ^GSPC). That strategy provides diversified exposure to hundreds of American businesses that are collectively "bound to do well" over time, according to Buffett.

What is Warren Buffett's investment strategy? ›

Warren Buffett's investment strategy has remained relatively consistent over the decades, centered around the principle of value investing. This approach involves finding undervalued companies with strong potential for growth and investing in them for the long term.

Is 80 20 a good investment strategy? ›

If you're a younger investor with a long time horizon and are comfortable taking on more risk, the 80/20 portfolio may be a good fit. However, if you're closer to retirement or prefer a more conservative approach, the 60/40 portfolio may be a better option.

Is 80/20 high risk? ›

With an 80/20 portfolio, the risk factor increases since you have more money going into stocks. The flip side of that, however, is that you may have more room to earn higher returns. While bonds can provide consistent income, returns are generally not on the same level as stocks.

What is the best asset allocation for my age? ›

The common rule of asset allocation by age is that you should hold a percentage of stocks that is equal to 100 minus your age. So if you're 40, you should hold 60% of your portfolio in stocks. Since life expectancy is growing, changing that rule to 110 minus your age or 120 minus your age may be more appropriate.

What is the difference between 70 30 and 80 20 asset allocation? ›

80:20 Portfolio. Similar to the 70:30 portfolio, the 80:20 portfolio yielded slightly lower total returns but provided better protection in volatile markets. This balance suggests that even a small proportion of debt can significantly impact risk mitigation.

What is the best portfolio mix for retirement? ›

Some financial advisors recommend a mix of 60% stocks, 35% fixed income, and 5% cash when an investor is in their 60s. So, at age 55, and if you're still working and investing, you might consider that allocation or something with even more growth potential.

Which asset allocation would you recommend? ›

For example, if you're 30, you should keep 70% of your portfolio in stocks. If you're 70, you should keep 30% of your portfolio in stocks. However, with Americans living longer and longer, many financial planners are now recommending that the rule should be closer to 110 or 120 minus your age.

Is 80/20 insurance good? ›

Is 80/20 Insurance Right for You? In the end, 80/20 insurance offers a lot of coverage but still does require a significant financial commitment from the policyholder. The choice of purchasing an 80/20 insurance policy all really comes down to what you can afford and what your medical needs are.

What is the best data split percentage and why? ›

Data should be split so that data sets can have a high amount of training data. For example, data might be split at an 80-20 or a 70-30 ratio of training vs. testing data. The exact ratio depends on the data, but a 70-20-10 ratio for training, dev and test splits is optimal for small data sets.

Why is the 80-20 rule effective? ›

The 80-20 rule maintains that 80% of outcomes comes from 20% of causes. The 80-20 rule prioritizes the 20% of factors that will produce the best results. A principle of the 80-20 rule is to identify an entity's best assets and use them efficiently to create maximum value.

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