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You’ve probably never heard of it, but it could be the most important investing model you ever use.
We call is the 50-40-10 method.
It’s extremely simple, which is part of the reason we love it so much at Money Morning.
It doesn’t matter whether you have a few thousand dollars to invest or a few million. The principles don’t change.
The 50-40-10 Strategy groups investments into three risk-adjusted tiers. They correspond loosely to the layers in the “Food Pyramid” we all grew up with:
- The bottom layer –the 50– is chock-full of stuff that seems boring but is actually very good for you.
- The middle layer –the 40– includes stuff that tastes good, helps you grow, and makes you want seconds.
- The top layer –the 10– is the beer and chips, or the chocolate mousse, depending on your palate. It’s the higher-risk stuff that can easily make you fat if you eat too much. But used in the right way, it can juice your portfolio to amazing heights.
That’s it. Three sections.
We take those and create a pyramid, which makes the concept even easier to visualize.
One quick look is all you need to understand that a specific kind of investment will be the “base” of your portfolio, while a smaller proportion is given to those at the top.
Visually, you understand that the higher you go “up” the pyramid, the more limited your choices become.
Even better, the pyramid helps with investment discipline, something all of us struggle with.
It forces you to make healthier choices – the “boring” but stable over the exciting but risky pick. You don’t get the chance to pile on everything from chips to sodas in a gluttonous feast – one that feels good at the time, but one you always end up regretting.
It’s critical to mention this because many investors wind up with far too many speculative choices on their investment plate. They get caught up in emotional investing that can wreak havoc with their serious money – money meant for the long term.
Not surprisingly, that’s when investors who think they’re “investing” find out the hard way that they’re blindly speculating.
Unfortunately, they find this out by getting slammed around when the markets turn foul. That’s primarily because their risk is disproportionately concentrated, even though their broker may convince them that their “diversified” portfolio is somehow “safer.”
With this method, you can weather any type of market condition. Whether the overall market is reacting to a war, crash, meltdown, melt-up, political upheaval, recession, or financial crisis, this investing strategy keeps your portfolio strong.
Reserving just 10% to “swing for the fences” might sound small, but it’s a healthy exposure to opportunity. By distributing our holdings using the 50-40-10 strategy, we distribute our risk more effectively than traditional diversification models do.
We encourage you to let go of Wall Street’s classic approach to diversification, which really just spreads your money around willy-nilly. With that strategy, you are at the mercy of unseen risks.
That’s not to mention emotional hang-ups too. They will override what you logically understand about the world and the opportunities being created right now.
Plus, the 50-40-10 method makes rebalancing your portfolio a breeze.
Regularly rebalancing your portfolio is extremely important. When you rebalance, you buy or sell different assets in your portfolio in order to maintain your desired level of risk.
Say you followed the 50-40-10 method. And during the last year, your growth stocks outperformed your base builders, and now account for 60% of your portfolio weight. You could sell 20% of your growth stock position and buy base builders in order to get back to your original allocation. Not only has your money grown, but you’ve protected it by moving it into less risky assets. By rebalancing, you’re making sure you’re managing your risk.
You can rebalance at regular time intervals (e.g., every three months) or after certain price triggers – for example, if an existing asset or asset class rises or falls in value by 20% from its original 50-40-10 allocation.
Many investors use their birthday as a reminder to review their portfolio. If price changes have left you “over-weighted” on a particular investment or asset class, you can try to sell some of those holdings and bank profits – or, ideally, use those proceeds to buy more of the assets on which have become “under-weighted.”
Then, once you’ve rebalanced accordingly, you can decide how put your new money to work. We recommend basing these choices not only on the merits of the individual asset, but also on maintaining the proper asset balance and risk exposure within the entire 50-40-10 portfolio.
You should never feel compelled to buy something just because you have money available.
Sometimes cash is the best thing you can hold. But the market has shown time and time again to be the best place to grow your money over the long term.
That’s why it’s best to position your new money at times when conditions favor upside activity.
And no matter what the market is doing, you can always find industries or stocks that are undervalued and presenting profit opportunities.
In the following lessons, we’ll show you exactly how to pinpoint these opportunities…
As an investment expert with a demonstrated understanding of various investment strategies, let me delve into the 50-40-10 method introduced in the article. My extensive knowledge in finance and investment allows me to shed light on the evidence-based principles that form the foundation of this strategy.
The 50-40-10 method is a straightforward yet powerful investment model that categorizes investments into three risk-adjusted tiers, resembling the layers of the "Food Pyramid." The bottom layer (50%) consists of stable and seemingly "boring" assets that provide a strong foundation for your portfolio. These assets may lack the excitement of higher-risk options but offer stability.
Moving up the pyramid, the middle layer (40%) includes investments that are a balance of growth potential and stability. These assets are likened to the foods that taste good, help you grow, and leave you wanting more.
At the pinnacle of the pyramid is the top layer (10%), representing higher-risk investments akin to beer and chips or chocolate mousse. While these assets have the potential to yield significant returns, they come with increased risk and the possibility of negative consequences if not managed carefully.
This method creates a visual representation of your portfolio, making it easier to grasp. The pyramid concept highlights that as you ascend, your choices become more limited. It also serves as a tool for maintaining investment discipline, nudging investors toward healthier choices – favoring stability over excitement.
A crucial aspect emphasized by the 50-40-10 strategy is its ability to withstand various market conditions, be it a war, market crash, political upheaval, or financial crisis. The 10% allocation to higher-risk assets provides exposure to potential opportunities without overcommitting to speculative ventures.
The article underscores the importance of departing from traditional diversification models, advocating for a strategic approach over a haphazard spread of investments. The 50-40-10 method is positioned as a more effective means of distributing risk.
Furthermore, the strategy encourages regular portfolio rebalancing, a fundamental practice in risk management. Rebalancing involves adjusting your asset allocation to maintain the desired level of risk. The example given illustrates how rebalancing can involve selling overperforming assets and purchasing underperforming ones, ensuring a balanced and risk-managed portfolio.
The article also touches on the significance of making informed choices when deploying new funds. It advises against buying assets solely because funds are available, emphasizing the importance of maintaining a balanced 50-40-10 portfolio. The market's long-term growth potential is acknowledged, and the article suggests positioning new funds during favorable market conditions.
In upcoming lessons, the article promises to provide insights into identifying undervalued industries or stocks and seizing profit opportunities within the framework of the 50-40-10 method. This holistic approach aligns with the strategy's emphasis on making informed, disciplined, and risk-managed investment decisions.