Model investment portfolios

One of the most common questions I get is how to invest money.  There’s so much information and choice out there that people get really confused about the right investments to choose.  Despite all the confusion and complexity of the investment industry, the starting point of making good investment decisions is to start with an investment plan.  Although this may make sense, it’s amazing how many people do not have an investment plan or if they do, it’s the “wing it strategy”.

Start with basic asset allocation

Regardless of whether you prefer mutual funds to individual stocks or Exchange Traded Funds (ETFs) to managed accounts, every portfolio should start with an allocation of assets based on your specific risk tolerance, investment objectives and time horizon.

Here’s some model portfolios built around the science of asset allocation and modern portfolio theory.

Conservative

Moderate

Balanced

Growth

Aggressive

Cash

10%

10%

5%

0%

0%

Bonds

70%

50%

35%

20%

0%

Canadian Equity

10%

25%

35%

55%

60%

US Equity

5%

7%

10%

10%

15%

Global Equity

5%

8%

15%

15%

25%

TOTAL

100%

100%

100%

100%

100%

Fixed Income

80%

60%

40%

20%

0%

Stocks

20%

40%

60%

80%

100%

100%

100%

100%

100%

100%

Let’s say you are a growth investor, these models suggest you should invest 55% of your money into Canadian Equities.  This might mean buying a few stocks of Canadian companies.  It might mean buying a few Canadian Equity mutual funds or maybe some exchange traded funds (ETFs).  Do the same with the other asset classes and you have a portfolio that is optimized to your personal needs and personality.

Download PDF of BASIC MODEL INVESTMENT PORTFOLIOS (1073)

Taking it to the next level

If you want to get a little more sophisticated, you can take the bonds and break them down into different types of bonds like government bonds, corporate bonds, and real return bonds.  With Canadian equities, you can invest in small cap companies to large cap companies.  With global investments, you can look at specific regions like US vs markets in Europe vs Asia, etc.

Here’s an example of taking diversification and asset allocation to the next level:

Conservative

Moderate

Balanced

Growth

Aggressive

Cash

10%

10%

5%

0%

0%

Bonds
– Government Bonds

50%

40%

25%

10%

0%

– Corporate Bonds

10%

5%

5%

5%

0%

– Real Return Bonds

10%

5%

5%

5%

0%

Canadian Equity
– Small Cap

3%

10%

10%

15%

15%

– Med/Lge Cap

7%

15%

25%

35%

45%

US Equity

5%

7%

10%

10%

15%

Global Equity

5%

8%

15%

15%

25%

Alternative Assets

5%

5%

TOTAL

100%

100%

100%

100%

105%

Fixed Income

10%

10%

5%

0%

0%

Stocks

20%

40%

60%

75%

100%

30%

50%

65%

75%

100%

Download PDF of ADVANCED MODEL INVESTMENT PORTFOLIOS (890)

Once you have your model portfolio worked out, remember that these model portfolios only serve as a guideline.  If you feel its important to alter the mix a little to suit your personal beliefs, you can do so.  The bottom line is to start with the model investment portfolio mix and then choose the right investments based on your personal beliefs and involvement.  Many experts suggest that if you get this part right, over 90% of your return is determined by asset allocation.

Written by Jim Yih

Jim Yih is a Fee Only Advisor, Best Selling Author, and Financial Speaker on wealth, retirement and personal finance. Currently, Jim specializes in putting Financial Education programs into the workplace. For more information you can follow him on Twitter @JimYih or visit his other websites Group Benefits Online and Advisor Think Box.

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