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

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

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:

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

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.

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