Moderate asset allocation models contain growth stocks, income-producing bonds, and cash. They are less risky than aggressive models but offer less growth. Bonds are less risky than stocks, but provide regular income payments. Cash securities are low risk and can protect assets during market downturns. Some investment firms offer moderate allocation models with varying levels of aggressiveness and diversity.
Investment firms and mutual fund companies often market pre-packaged portfolios of investments that are ranked according to risk and are typically labeled aggressive, moderate, or conservative. A moderate asset allocation model contains growth stocks like stocks, income-producing stocks like 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 realm of investment, stocks are classified as growth instruments because a stock could increase in value indefinitely if the company that issued the stock continues to grow and generate profits. However, a stock can become worthless if the issuer goes bankrupt. Therefore, stocks provide investors with the opportunity for unlimited growth, but also expose investors to primary risk. Models vary among investment firms, but up to 60 percent of the assets within a moderately allocated 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 good times, but they may lose less during market downturns.
Bonds expose investors to principal risk because a bond becomes worthless if the issuer defaults on the debt. However, when a bond issuer becomes insolvent, bondholder claims are dealt with before shareholder claims, meaning 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-producing pension plans. Between 25 and 40 percent of the assets within 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 (CDs). These instruments typically represent between 15 and 20 percent of the portfolio’s total assets. Investors who invest in cash securities are virtually assured of holding on to 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, as these investors have little to no growth stock in their portfolios.
Some investment firms have moderate asset allocation models subdivided into moderate aggressive moderate, moderate aggressive and moderate conservative. Aggressive allocation models contain a higher percentage of stock, while more conservative models contain a higher percentage of cash. Many investment firms offer moderate allocation models that contain stocks from one sector of the economy, such as financial firms, while others add maximum diversity by including stocks from many sectors and many nations.
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