What Is a Growth Asset Allocation Model?

K. Kinsella
K. Kinsella
Woman holding a book
Woman holding a book

Growth asset allocation is a structured portfolio of securities that is designed to provide investors with the opportunity for long-term growth. Their exact make-up varies between investment firms but growth oriented portfolios normally contain a high percentage of stocks and minimal amounts of cash equivalents and other types of low risk securities. Generally,growth asset allocation is designed to grow over a period of 10 years or more rather than in the short-term.

Stocks represent an ownership stake in a publicly traded company which means that the value of a stock will rise and fall in conjunction with the financial performance of the company as a whole. In theory, a company could keep expanding indefinitely in which case the value of stocks in the firm would continue to rise. Consequently, stocks are regarded as growth instruments because other types of securities such as bonds, annuities and Certificates of Deposits (CD) have limited terms which means that those securities cannot provide investors with the same opportunity for unlimited growth.

While all stocks are regarded as growth instruments, large multi-national firms have less room to grow when compared with small firms. Consequently, small cap stocks in smaller firms can provide investors with even more opportunity for growth than stocks in large companies. Additionally, companies in the developing world have more growth opportunity than businesses in developed markets since firms that operate in economically developed nations have more competition and more regulations to contend with. The most aggressive growth asset allocation models are based around investing a large percentage of the investor's money in small cap stocks and stocks issued by firms in the developing world.

Investment returns are always impacted by the degree of risk that an investor is willing to assume. Bonds and other fixed instruments have certain principal protections which mean that investors assume minimal levels or risk when the buy these securities. Consequently, yields on these securities are relatively low. Stocks offer investors unlimited growth potential but the chance for growth also comes at a cost since there are no principal guarantees and stocks can lose all value if the issuing firm goes bankrupt. Therefore, growth asset allocation models are best suited for investors with a long-term horizon who can stay in the market long enough to experience downturns and still have time to recover.

A growth asset allocation model details the percentage of the investor's money that will be held in each type of security. The investment company may have to buy and sell shares to ensure that the percentage of money invested in each type of security always remains level despite changes in value of the underlying securities. To prevent investors from losing all of their money during a market downturn, a certain percentage of the investor’s money is normally invested in low risk securities such as bonds or CDs. Therefore, a growth asset allocation model is an aggressive investment option but it may provide investors with a degree of safety.

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