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Investing strategies

Investment portfolios: Asset allocation models

How do you choose how much you want to invest in stocks or bonds? Asset allocation models can help you understand different goal-based investment strategies. To find the asset allocation that's right for your investment portfolio, it's important to have a clear understanding of your goals, time frame, and risk tolerance.

What is an investment portfolio?

Before you consider the different 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. Portfolios can include a variety of different assets, such as stocks, bonds, cash, and real estate. The goal of an investment portfolio is to generate returns over time, while also managing risk..

What is an asset class?

An asset class is a group of investments such as stocks, bonds, and short-term or "cash" investments. Investing in different asset classes is a way to diversify your portfolio, which can reduce your risk of losses. Here are the most common asset classes:

  • Stocks. When you purchase a stock, you’re buying a small piece of a company. This means you’re entitled to a share of the company's profits. Stocks are often a riskier investment than bonds, but they also have the potential to generate higher returns.
  • Bonds. When you buy a bond, you’re loaning money to a company or government. The borrower agrees to pay you back the principal amount of the loan plus interest over time. Bonds are typically a safer investment than stocks, but they also tend to generate lower returns.
  • Cash. Cash and cash equivalents are the lowest risk, most liquid asset class, meaning that these assets can be easily accessed and are designed not to incur any significant losses. Examples of cash and cash equivalents include savings accounts, money market funds, and CDs (certificates of deposit).
  • Real estate. This is a tangible asset that can be used for a variety of purposes, such as residential, commercial, or industrial. Real estate can be a good investment for generating income or for long-term appreciation. However, it’s important to note that real estate is a relatively illiquid asset that can be difficult to sell quickly.
  • Commodities. These are raw materials that are used to produce other goods and services. Examples of commodities include oil, gold, and wheat. They can be a volatile asset class, but they can also offer diversification benefits

What is an asset allocation fund?

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 then rebalances the portfolio on a regular basis to maintain the desired allocation. They're a convenient way to invest in a diversified portfolio of assets. 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.

How to build a diversified portfolio

Diversifying your portfolio is one of the best ways to manage risk. At Vanguard, you can build a highly diversified portfolio with just 4 ETFs. You can select:

  • Vanguard Total Bond Market ETF
  • Vanguard Total International Bond ETF
  • Vanguard Total Stock Market ETF
  • Vanguard Total International Stock ETF

Learn more about how to build a diversified portfolio with Vanguard ETFs.

Are there specific asset allocation models I can select?

Vanguard also has a series of allocation models and investment portfolios you can choose from to fit your financial goals. The models are strategies that help investors choose how much to invest in stocks or bonds based on their goals and risk tolerance. 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. The models 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 suitable for anyone who's in or nearing retirement. It can generate a steady stream of income for investors. It can also be helpful for someone who's looking to achieve a specific goal, such as a down payment on a house.

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 high risk tolerance and a long-term investment time horizon. Generating current income isn’t a primary goal. An investor's goal for using this model could be to fund a large purchase in the future or grow wealth for retirement. It is the riskiest of the 3 models because it invests in the highest percentage of stocks.

The chart below represents the different portfolios you can create based on allocation models. It also represents their historical performances.

Starting from the left, this percentage split would represent an income portfolio. As you move toward the center, you're beginning to enter a balanced portfolio. And on the far right you have a growth portfolio. Each model features its best returns, its worst returns, and its average annual return percentage.

Source: Vanguard. Notes: Data for U.S. stocks is from Standard & Poor’s 90 from 1926–1957, S&P 500 Index from 1957–1974, Wilshire 5000 Index from 1975–2005, MSCI US Broad Market Index from 2005–2013, and CRSP US Total Market Index from 2013–2022. Data for U.S. bonds is from Standard & Poor’s High Grade Corporate Index from 1926–1968, Citigroup High Grade Index from 1969–1972, Lehman Brothers U.S. Long Credit AA Index from 1973–1975, Bloomberg US Aggregate Bond Index from 1976 –2009, and Bloomberg US Aggregate Float Adjusted Bond Index thereafter.

Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.

Why should you align your portfolio allocation with your financial goals?

Your asset allocation should be aligned with your financial goals, the time frame in which you want to accomplish those goals, and your risk tolerance. Taking these 3 factors into account will give you the best chance of having the amount of money you need when you need it.

If you have short-term financial goals, such as buying a house in the next year, you have a short time horizon and could consider a more conservative asset allocation by choosing investments that are less volatile, such as bonds and cash.

If you have long-term financial goals, like a retirement that's many years away, you can afford to have a more aggressive asset allocation. This means that you can invest more in riskier assets that have the potential for higher returns, such as stocks, without being as worried about short-term market volatility.

How do I start my investment portfolio?

To align your portfolio allocations with your financial goals, you should follow these steps:

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

How much risk are you comfortable with? Some people are more comfortable with the higher risk that comes with investing in stocks, while others prefer to take a safer approach and invest more in bonds. It's important to choose an asset allocation that's appropriate for your risk tolerance.

3. Determine your time horizon

How much time do you have to invest before you'll need to use the money for your financial goals? If you have a short-term time horizon, a more conservative asset allocation would make sense. If you have a long-term time horizon, you can afford to be more aggressive with your asset allocation.

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 willing to take 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 steady yet fulfilling. 

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. There are a wide variety of investments 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 need to rebalance it regularly. This means selling some of the investments that have performed well and investing more in other asset classes or adding additional money to the account in the asset class below its target allocation.

Vanguard's knowledgeable advisors are here to learn more about your financial goals and help you determine your best next steps. Partner with one today.

All investing is subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss.

For more information about Vanguard funds or ETFs, visit to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.

You must buy and sell Vanguard ETF Shares through Vanguard Brokerage Services (we offer them commission-free) or through another broker (which may charge commissions). See the Vanguard Brokerage Services commission and fee schedule for full details. Vanguard ETF Shares are not redeemable directly with the issuing fund other than in very large aggregations worth millions of dollars. ETFs are subject to market volatility. When buying or selling an ETF, you will pay or receive the current market price, which may be more or less than net asset value.

There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. Bond funds are subject to the risk that an issuer will fail to make payments on time, and that bond prices will decline because of rising interest rates or negative perceptions of an issuer's ability to make payments. Investments in bonds are subject to interest rate, credit, and inflation risk. Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk. Funds that concentrate on a relatively narrow market sector face the risk of higher share-price volatility.

Investments in target-date funds are subject to the risks of their underlying funds. The year in the fund name refers to the approximate year (the target date) when an investor in the fund would retire and leave the work force. The fund will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. An investment in target date funds is not guaranteed at any time, including on or after the target date.

Vanguard's advice services are provided by Vanguard Advisers, Inc. ("VAI"), a registered investment advisor, or by Vanguard National Trust Company ("VNTC"), a federally chartered, limited-purpose trust company.

The services provided to clients will vary based upon the service selected, including management, fees, eligibility, and access to an advisor. Find VAI's Form CRS and each program's advisory brochure here for an overview.

VAI and VNTC are subsidiaries of The Vanguard Group, Inc., and affiliates of Vanguard Marketing Corporation. Neither VAI, VNTC, nor its affiliates guarantee profits or protection from losses.

IMPORTANT: The projections and other information generated by the Vanguard Capital Markets Model regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. VCMM results will vary with each use and over time.

The VCMM projections are based on a statistical analysis of historical data. Future returns may behave differently from the historical patterns captured in the VCMM. More important, the VCMM may be underestimating extreme negative scenarios unobserved in the historical period on which the model estimation is based.

The Vanguard Capital Markets Model® is a proprietary financial simulation tool developed and maintained by Vanguard's primary investment research and advice teams. The model forecasts distributions of future returns for a wide array of broad asset classes. Those asset classes include U.S. and international equity markets, several maturities of the U.S. Treasury and corporate fixed income markets, international fixed income markets, U.S. money markets, commodities, and certain alternative investment strategies. The theoretical and empirical foundation for the Vanguard Capital Markets Model is that the returns of various asset classes reflect the compensation investors require for bearing different types of systematic risk (beta). At the core of the model are estimates of the dynamic statistical relationship between risk factors and asset returns, obtained from statistical analysis based on available monthly financial and economic data from as early as 1960. Using a system of estimated equations, the model then applies a Monte Carlo simulation method to project the estimated interrelationships among risk factors and asset classes as well as uncertainty and randomness over time. The model generates a large set of simulated outcomes for each asset class over several time horizons. Forecasts are obtained by computing measures of central tendency in these simulations. Results produced by the tool will vary with each use and over time.