What Is the 1/3, 1/3, 1/3 Investing Strategy?

Investing in stocks, bonds, mutual funds and exchange traded funds (ETFs) is a great way to build wealth, but the stock market can be volatile. That’s why investors look for strategies that balance risky stocks with more stable investments like cash and bonds, as well as investments that tend to perform well during inflation periods.

One approach to diversifying an investment portfolio is the 1/3, 1/3, 1/3 investing strategy, a simplified and balanced approach that caters to a wide range of investors.

Understanding the 1/3, 1/3, 1/3 Strategy

The 1/3, 1/3, 1/3 investing strategy divides your investment portfolio into three equal parts:

1. Cash and cash equivalents. This bucket includes assets like cash, certificates of deposit (CDs), Treasury bills and funds in money market accounts. It can also include I Bonds and EE Bonds, which you can cash in after holding for at least one year without losing your principal (although you will lose out on the interest you would have earned if you held it for five years).1 These investments are generally considered safe and are extremely liquid, providing stability and accessibility in your portfolio. They also tend to perform well during times of inflation because inflation typically prompts the Federal Reserve Board to raise the federal funds rate. This increases the amount of interest savers earn on these types of investments.


2. Marketable securities. This bucket comprises stocks, bonds (other than I Bonds and EE Bonds), mutual funds and ETFs. These investments are more volatile than cash and cash equivalents but offer higher growth potential over the long term. They’re also relatively liquid because they can easily be bought and sold on a public exchange, although you may lose some of your original investment if you need to sell them when the market is down.2


3. Non-traditional assets. This category includes real estate, commodities, precious metals, and interest in a closely held business. Real estate investments can range from equity in your primary residence to investment properties to real estate investment trusts (REITs). Commodities might include physical assets like gold, industrial commodities like copper or crude oil, or agricultural commodities like soybeans, wheat, or livestock. These assets act as a hedge against inflation because they typically retain or increase their value during inflationary periods.3

Pros and Cons of the 1/3, 1/3, 1/3 Strategy

As with all investment strategies, the 1/3, 1/3, 1/3 portfolio has its share of pros and cons:

Pros:

• Diversification. This portfolio gives you a simple rule of thumb for diversifying your portfolio across different asset classes. This diversification generally reduces risk and generally enhances potential returns, as when stocks are down, the value of cash and cash equivalents and non-traditional assets may be more stable, and vice versa.


• Flexibility. This strategy can be tailored to your circumstances. For example, if you don’t have the money to invest in commodities or investment property, your non-traditional asset bucket might simply consist of equity in your home. If you rent instead of own, you might diversify by investing in a REIT, allowing you to gain real estate exposure without directly owning property.


• Inflation protection. Non-traditional assets like real estate and commodities often help hedge against inflation because their value tends to hold steady or go up during inflationary times.4 Interest-bearing cash equivalent investments also tend to do better during inflationary periods because of rising interest rates.

Cons:

• Complexity. Managing three distinct asset classes requires more effort and knowledge. You may need to rebalance your portfolio periodically to maintain the 1/3, 1/3, 1/3 split between asset classes.