Differences & Similarities of Aggressive & Conservative Asset Mix Strategies

Many financial institutions and investment advisory services offer investors different allocation models as tools and guidelines for constructing investment portfolios. Depending on the relative composition of assets in these portfolios, a certain asset mix may be considered conservative or aggressive. There is no set formula for what constitutes a conservative or aggressive portfolio. Great variability can exist, yet a conservative asset mix strategy tends to favor lower risk and income generation, whereas an aggressive mix is more willing to stomach risk in exchange for more vigorous returns. While the two may seem diametrically opposed, they are not so far-flung in that they share many of the same building blocks.

Portfolio Composition

On the face of it, conservative and aggressive asset mix strategies are not so disparate that they use completely different investment vehicles, although they can. They might use the same mix of assets, just in different proportions to one another. A conservative portfolio might consist of an equal mix of equities and bonds. The equities portion might be divided into 10 percent each of small- to mid-cap stocks, 25 percent large-cap stocks and 5 percent international stocks. Up to 40 percent of the portfolio could be in intermediate bonds and 10 percent in short-term bonds. An aggressive portfolio, in contrast, might include all of the same assets, but with equal distributions among the different types of stocks. It would exclude the short-term bonds and add 10 percent in emerging market stocks, such that only 10 percent of the portfolio consists of bonds.

Risk

Portfolio components may be one point of similarity between aggressive and conservative asset mix strategies, but when it comes to risk and volatility, the two approaches have opposite risk tolerances. An aggressive portfolio, at its worst, might see a 30 percent decline, which would be too steep for a conservative investor, who would be more comfortable with a maximum loss of 15 percent, if any.

Returns

In exchange for the extra volatility that they are willing to endure, aggressively-oriented investors can be rewarded with higher returns than are those with conservative outlooks. An aggressive portfolio composed of no bonds and between 19 and 37 percent in growth and value indices plus ETFs might net 16.58 percent year to date, while a conservative asset mix of 50 percent bonds and relatively smaller proportions of value, growth and dividend indices would yield 8.65 percent YTD.

Time Horizon

Neither aggressive nor conservative asset mix strategies have a lockdown on the timeframes in which they would like to invest. A person nearing retirement and thus with a relatively short time horizon of 5 years, may not want to see a lot of volatility in his portfolio and prefer a conservative asset mix. In the meantime, an investor far from retirement might seek greater growth and thus a more aggressive mix over a long-term time horizon. Nonetheless, this is not to say that these two approaches could not each invest with a different timeframe in mind. Either type of strategy could opt for a long-term, intermediate or short-term approach that is consistent with an aggressive or conservative profile. Thus, in the shorter term, a conservative investor might opt for 85 percent of his portfolio to be in money markets. In the long term, however, he might spread out his holdings over a broader range of up to 50 percent stocks and 30 percent bonds. In the short term, an aggressive investor might trade off some of his longer-term bundle of 80 percent stocks for 30 percent in money markets to provide income and stability.