Asset allocation is the strategy of dividing your investment portfolio across different asset classes to balance risk and reward according to your goals, time horizon, and risk tolerance.
Major Asset Classes
- Stocks: High growth potential, higher volatility
- Bonds: Regular income, lower volatility
- Cash: Stability, minimal returns
- Real Estate: Income and appreciation potential
Determining Your Allocation
Your ideal allocation depends on your age, goals, and risk tolerance. A common rule of thumb is to subtract your age from 110 to find the percentage of stocks in your portfolio.
Sample Allocations
Conservative (age 60+): 40% stocks, 50% bonds, 10% cash
Moderate (age 40): 70% stocks, 25% bonds, 5% cash
Aggressive (age 25): 90% stocks, 10% bonds
Rebalancing
Over time, market movements will shift your allocation away from your targets. Rebalancing — selling overperforming assets and buying underperforming ones — brings your portfolio back in line.
