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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:
- 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.
- 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
- 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 reduces risk and 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.
Non-traditional assets — like real estate, commodities and precious metals — act as a hedge against inflation because they typically retain or increase their value during inflationary periods.
Comparing the 1/3, 1/3, 1/3 Approach to the Traditional 60/40 Portfolio
The traditional 60/40 portfolio, which allocates 60% to stocks and 40% to bonds, has been a staple recommendation for balanced investing for decades. However, this strategy has suffered in recent years as high inflation and high interest rates have hurt the prices of both stocks and bonds.6
The 1/3, 1/3, 1/3 strategy offers a broader diversification by including cash and cash equivalents and non-traditional assets like real estate and commodities in the mix. This diversification preserves the purchasing power of your investments and helps ensure at least one segment of your portfolio performs well regardless of the economic climate.
It’s particularly advantageous during inflationary periods, as real estate and commodities tend to perform well when inflation rises. In addition, when inflation is high, the Federal Reserve raises interest rates, allowing you to earn better returns on cash and cash equivalents. But the stock market may not perform as well under these conditions, since higher interest rates tend to have a cooling effect on the economy.
When the economy cools, the value of commodities may also go down because of lower employment. When the Federal Reserve drops interest rates to stimulate economic growth, stocks tend to do better, and cash equivalents — while providing principle protection — don't generate a high return on investment.
That’s not to say the 60/40 portfolio doesn’t have a place. It can still be an effective balance within your marketable securities bucket. However, it lacks the additional diversification and inflation protection provided by non-traditional assets.
Managing Your Portfolio’s Investment Risk
Diversification is a crucial part of managing your portfolio’s investment risk, no matter the economic conditions. By allocating investments across various asset classes, you can achieve stability, growth and inflation protection.
While the 1/3, 1/3, 1/3 strategy may require more hands-on management and a deeper understanding of different asset classes and potential investments within each bucket, its benefits make it a compelling alternative to traditional portfolios.
As always, your financial advisor can help you tailor this strategy to your specific needs and build a resilient portfolio that aligns with your financial goals.
Important disclosure information
This content is general in nature and does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.
- TreasuryDirect, “Cashing Savings Bonds,” accessed August 12, 2024. Back
- Corporate Finance Institute, “Marketable Securities,” accessed August 12, 2024. Back
- Tory Reiss, “Pros and Cons of Adding Alternative Investments to Diversify Your IRA,” Kiplinger. Published August 10, 2023, accessed August 12, 2024. Back
- Matt Whittaker, Paul Curcio & David Tony, “Mastering the basics of how to invest in commodities,” CNN, published April 8, 2024, accessed August 12, 2024. Back
- Ashlea Ebeling, "Got Alternative Assets In Your IRA? Watch Out," Forbes, published December 15, 2020, accessed August 12, 2024. Back
- Amy Arnott, “What Higher Inflation Means for Stock and Bond Correlations,” Morningstar, updated May 14, 2024, accessed August 12, 2024. Back
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