Explore Vanguard's model portfolio allocation strategies. Learn how to build diversified portfolios that match your risk tolerance and investment goals.
Investment portfolios: Asset allocation models
One of the most important investing decisions isn’t which investments you choose—it’s how you allocate your money among them. We’ll explain how model portfolios work and how to select an allocation that supports your long-term goals.
- Start with your goals. Identify what you’re investing for and what the time frame is.
- Assess your risk tolerance and how much market fluctuation you’re comfortable with.
- Choose the right asset mix to align with your goals, timeline, and risk tolerance.
- Diversify across asset classes to help balance risk and return.
- Rebalance periodically and adjust your allocation as your goals or circumstances evolve.
What is an investment portfolio?
Before you consider different asset allocation models, it's important to understand what an investment portfolio is. An investment portfolio is a collection of investments held by an individual or institution. It can include a variety of different assets, from stocks and bonds to cash and real estate.
Your financial goals are the foundation for your investment portfolio. You can determine which assets are right for you based on your timing and risk tolerance. Understanding the different investment options available to you can help you make better decisions about your investment portfolio.
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What is an asset class?
An asset class is a category of investments, such as stocks, bonds, or cash, that share similar characteristics and behave similarly in the market. Each asset class responds differently to market movement. Holding investments from each one can reduce your risk and position your portfolio to better weather market ups and downs.
Here are the most common asset classes:
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How different asset mixes perform
The chart below shows asset mixes and their historical performance. From left to right, it moves from an all-stock allocation to an all-bond allocation. The chart shows how your mix of stocks and bonds is a key driver of the range of returns in any given year. The more stocks you own, the higher the potential return, but also the higher the potential loss.
Notes: Past performance is no guarantee of future results. The performance of an index does not represent any actual investor return as one cannot invest directly in an index. U.S. stocks represented by the S&P 90 Index from 1928 through 1956; S&P 500 Index from 1957 through 1970; Wilshire 5000 from 1971 through 2004; MCSI US Broad Market Index from 2005 through 2012; CRSP US Total Market Index thereafter. International stocks represented by the MSCI World ex USA Index from 1970 through 1987; MSCI All Country World Index ex USA from 1988 through 2002; FTSE Global All Cap ex US Index thereafter. U.S. bonds represented by the IA SBBI U.S. Intermediate-Term Government Bond Index through 1972; Bloomberg U.S. Government/Credit Intermediate-Term Index from 1973 through 1975; Bloomberg U.S. Aggregate Bond Index thereafter. International bonds represented by the Bloomberg Global Aggregate ex USD Index (Hedged) from 1991 through 2012; Bloomberg Global Aggregate xUSD Float Adjusted RIC Index (Hedged) thereafter. Stocks were 100% U.S. from 1928 through 1969 and 60% U.S./40% International thereafter. Bonds were 100% U.S. from 1928 through 1990 and 70% U.S./30% International thereafter.
Sources: Vanguard calculations based on data provided by Morningstar as of December 31, 2025.
What is an asset allocation fund?
Asset allocation funds are a convenient way to invest in a diversified portfolio of assets.
An asset allocation fund is a type of mutual fund or ETF (exchange-traded fund) that invests in a mix of different asset classes, such as stocks, bonds, and cash. The fund manager typically allocates a specific percentage of the fund's assets to each asset class and rebalances the portfolio regularly to maintain the desired allocation. Each asset class responds differently to market movement. Holding investments from each one reduces your overall risk, which means your portfolio is designed to be in a better position to weather market ups and downs.
Here are some common types of asset allocation funds:
Target-date funds. These funds are designed to help investors save for retirement. They automatically adjust their asset allocation over time, becoming more conservative as the fund's target date approaches.
Balanced funds. These funds typically invest in a mix of stocks and bonds, with a focus on income and capital appreciation.
Growth funds. These funds invest primarily in stocks, with the goal of generating capital appreciation at a quick rate.
Income funds. These funds invest primarily in bonds and other income-generating assets.
Why are diversification and asset allocation important in an investment portfolio?
Diversification and asset allocation typically go hand in hand when you’re building a portfolio. But they’re not the same concept.
Asset allocation is how you decide to apply your money across broad investment types—like stocks, bonds, and cash—based on your goals, time horizon, and comfort with risk. When you keep all your money in one asset class, whether stocks, bonds, or real estate, you risk losing more during market downturns or geopolitical events. That’s why a thoughtful approach to allocation of your assets matters.
Diversification is how you spread your money within and across those asset classes.
Diversifying your portfolio is one of the best ways to manage risk. Rather than trying to pick potential winners and avoid potential losers, diversification calls for holding a variety of different assets to help increase your chances of long-term success.
Asset allocation helps shape your portfolio’s overall risk and return potential, while diversification helps reduce the impact of any single investment. Together, they can help you build a portfolio designed to support your long-term goals through different market environments.
What is an asset allocation model?
Asset allocation funds offer a pre-set, diversified portfolio designed for a hypothetical investor. On the other hand, asset allocation models give you the flexibility to tailor your portfolio to your unique goals, time frame, risk tolerance, and more. While funds are one-size-fits all, models empower you to create a personalized investment mix.
Vanguard has a series of asset allocation models you can choose from to fit your financial goals. These models use Vanguard's proprietary tools, such as the Vanguard Asset Allocation Model (VAAM) and the Vanguard Capital Markets Model®, which project the expected returns and interrelationships of different asset classes over time. They reflect a philosophy of using broadly diversified, low-cost index funds to achieve a prudent risk-return balance.
Income portfolio
An income portfolio consists primarily of dividend-paying stocks, which are stocks from companies that pay out a portion of their profits to their shareholders, and coupon-yielding bonds, which are bonds that pay regular interest to investors. Keep in mind that, depending on the type of account in which these investments are held, dividends and returns can be taxable.
This model can be appropriate for anyone who’s in or nearing retirement. It can generate a steady stream of income for investors.
Balanced portfolio
A balanced portfolio invests in both stocks and bonds to reduce potential volatility. An investor seeking a balanced portfolio is comfortable tolerating short-term price fluctuations, is willing to accept moderate growth, and has a mid- to long-range investment time horizon. It's an appropriate strategy for many investors who are seeking a comfortable retirement. This allocation model is designed to generate income while also preserving capital. It can work well for investors who want to grow their wealth over time without overextending their risk tolerance.
Growth portfolio
A growth portfolio consists of mostly stocks that are expected to appreciate over the long term and could potentially experience large short-term price fluctuations. An investor considering this portfolio should have a higher risk tolerance and a long-term investment time horizon. Generating current income isn't a primary goal. An investor could use this model to fund a large purchase in the future or grow wealth for retirement. It's the riskiest of the 3 models because it invests in the highest percentage of stocks.
Asset allocation by age
Age can be a helpful starting point when thinking about your portfolio, but it’s not the whole story. Two investors who are the same age may need very different asset allocations if their goals—and timelines—are different. For example, someone nearing retirement in 10 years may choose a more conservative mix, while someone planning to work longer may stay more heavily invested in stocks for growth. Asset allocation decisions are ultimately driven by your time horizon and tolerance for risk, not age alone.
That’s why it’s often more useful to think in terms of time to goal. As your goal approaches, you may want to gradually shift toward a more balanced or conservative mix to help reduce volatility. Solutions like Target Retirement Funds are designed with this in mind—they automatically adjust your asset allocation over time to stay aligned with the target date.
Why should you align your portfolio allocation with your financial goals?
To give yourself the best chance of investment success, it's important to choose an asset allocation model that aligns with your financial goals—how much you'll need, your time horizon, and your risk tolerance.
For a short-term financial goal, such as saving for a down payment on a house, you may want to consider an income portfolio that also aims to preserve your principal investment. Your retirement goals, on the other hand, will have both short- and long-term horizons. When you're in retirement, you'll need some money for daily expenses, but other assets won't be touched for years. For the longer-term portion of those savings, a growth portfolio offering the potential for higher returns in exchange for a higher level of risk could be a better fit.
How to build a diversified investment portfolio
Before choosing investments for your portfolio, understanding your financial goals, risk tolerance, and time horizon can help you design a portfolio that works for you.
Below are some steps you can take, and important questions to ask yourself, to align your portfolio allocation with your financial goals. (You can also take our Investor Questionnaire to get recommendations that align with your needs.)
1. Identify your financial goals
What are you saving for? Do you want to buy a house? Retire early? Pay for your child's education? Once you know your financial goals, you can start to develop a plan to achieve them.
2. Assess your risk tolerance
Understanding your risk tolerance is essential to building an investment portfolio aligned to your goals. When deciding what level of risk is right for you, it comes down to not only what you're comfortable with, but also what you can afford. While you may feel at ease with market volatility and the higher risk that comes with investing in stocks, your financial position may require a more conservative approach that also includes bonds.
Ultimately, the key is to align your asset allocation with both your emotional tolerance and your capacity to absorb potential losses. Striking the right balance helps you stay on track with your goals, even when the market fluctuates.
3. Determine your time horizon
How long do you have to save for your goal? For a short-term goal, a more conservative asset allocation can help protect your savings from market fluctuations. For a long-term goal, you can generally afford to be more aggressive.
Your time frame also affects how much you'll need to save. Let's say you want a $10,000 down payment in 6 years. If you open an account with $100 that earns a 6% average annual return, you'll need to save around $114 a month for 6 years to reach $10,000. All other factors being equal, if you want the same down payment in only 3 years, you'll have to save more than $250 a month.
The timing of your withdrawals is also important. If you're saving for a down payment on a house, for example, you'll likely make one large withdrawal. If you're saving for retirement, you'll spread out your withdrawals over many years.
Note: This hypothetical example does not represent the return on any particular investment and the rate is not guaranteed.
4. Choose your asset allocation
It's important to find the right balance, especially when it comes to asset allocation. It determines how much risk you're exposed to and the pace of your progress. A well-balanced asset allocation can help you ensure your portfolio can weather market storms while still reaching your destination. It's about finding a balance that's likely to achieve your goals in the desired time frame.
5. Choose your investments
Once you've determined your asset allocation, you need to choose the specific investments you want to include in your investment portfolio. A wide variety of investments are available, so it's important to do your research and choose investments that are appropriate for your financial goals and risk tolerance.
6. Rebalance your portfolio regularly
Over time, the performance of different asset classes will vary. This can cause your asset allocation to drift away from your target allocation. To keep your portfolio aligned with your financial goals, you'll need to rebalance it regularly. This can means selling some of the investments that have performed well and investing the proceeds in other asset classes, or adding money to any asset class that's below its target allocation.
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