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What Is Moderate Asset Allocation?

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  • Written By: K. Kinsella
  • Edited By: Shereen Skola
  • Last Modified Date: 24 September 2016
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Investment firms and mutual fund companies often market pre-packaged portfolios of investments that are categorized according to risk and these are normally labeled as aggressive, moderate or conservative. A moderate asset allocation model contains growth securities such as stocks, income generating securities such as bonds, and cash. Investors seeking above average growth who cannot afford to take big risks often invest in moderate asset allocation plans rather than conservative or aggressive plans.

In the investment arena, stocks are classified as growth instruments because a stock could rise in value indefinitely if the company that issued the stock continued to grow and generate profits. However, a stock can lose all value if the issuer files bankruptcy. Therefore, stocks provide investors with the opportunity for unlimited growth but also expose investors to principal risk. Models vary between investment firms but up to 60 percent of the assets inside a moderate allocation portfolio are invested in growth securities such as stocks. Investors with moderate investment strategies do not enjoy the same level of growth as aggressive investors during boom times but stand to lose less during market downturns.

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Bonds expose investors to principal risk because a bond becomes worthless if the issuer defaults on the debt payments. However, when a bond issuer becomes insolvent the claims of bondholders are dealt with ahead of the claims of stockholders which means that bonds are less risky than stocks. Bondholders receive regular income payments from the bond issuer which means that bonds are a common feature of income generating pension plans. Between 25 and 40 percent of the assets inside a moderate portfolio are invested in bonds.

A moderate asset allocation model also contains cash or some type of cash equivalent securities such as certificates of deposit (CD). These instruments normally account for between 15 and 20 percent of the portfolio's total assets. Investors who invest in cash securities are virtually assured of retaining some of their assets during a market downturn because these securities are low risk and some are even federally insured. However, conservative investors lose even less since these investors have few if any growth securities in their portfolios.

Some investment firms have sub-divided moderate asset allocation models into aggressive moderate, moderate and conservative moderate. Aggressive allocation models contain a higher percentage of stocks while more conservative models contain a higher percentage of cash. Many investment firms offer moderate allocation models that contain securities from one sector of the economy such as financial firms while others add maximum diversity by including securities from many sectors and from many nations.

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