How to Determine Your Asset Allocation
When was the last time you reviewed your asset allocation? If you're not sure what yours is, or if you've never taken a close look at it, it might be time to give it some attention. Asset allocation is a key factor in determining the potential growth of your portfolio — and also the level of risk you're taking on. In this post, I'll talk about why it's important to regularly assess your asset allocation and how you can determine if you need to make adjustments, especially after the market performance we've seen this year.
What is Asset Allocation?
If you're not familiar with the term, asset allocation is simply the way your investment portfolio is divided among different asset classes. The five main asset classes are:
Cash
Stocks
Bonds
Real Estate
Commodities
These can be broken down into two categories:
Safe Asset Classes: Cash and bonds
Growth or Riskier Asset Classes: Stocks, real estate, and commodities
Your allocation between safe and risky asset classes determines how much growth your portfolio might see — but it also dictates how much fluctuation (or volatility) you might experience. The more you invest in growth-oriented assets, the higher the potential returns but also the greater the risk of short-term market dips.
Why Asset Allocation Matters
I often meet people who have no idea what their asset allocation looks like. Many people tell me they consider themselves conservative investors, only to find out they have nearly all their money in stocks or other risky assets.
For example, I might hear from someone saying, “I’m a conservative investor,” but when we dive into their portfolio, we discover they’re 95% invested in high-risk assets like stocks and commodities. That’s far from conservative!
As you approach retirement, it becomes even more crucial to reassess your asset allocation. If you're in your 30s or 40s, it's okay to have most of your investments in riskier assets like stocks and real estate. But as you get closer to your 50s and 60s, you’ll likely want to shift more of your portfolio into safe assets like cash and bonds. This helps protect the wealth you've built and reduces the risk of significant losses as you near retirement.
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How to Determine Your Asset Allocation
If you're not sure where your investments stand, it’s time to figure it out. There are a few ways you can go about this:
1. 401(k) or Investment Account Provider: Some 401(k) providers or investment companies will break down your asset allocation for you on your statement. This is the easiest option if it’s available. However, be careful! Some providers list your asset allocation by investment type (like mutual funds), but you need to look deeper. A mutual fund may hold a mix of stocks, bonds, or other assets, so you need to know what’s inside each fund to get an accurate breakdown.
2. Manual Calculation: If your provider doesn’t give you a breakdown, or if you have multiple investment accounts spread across different companies, you may need to do a bit more work. Here’s how:
Step 1: List all your investments in a spreadsheet. Include the name of the investment and its symbol.
Step 2: Categorize each investment into one of the five asset classes: cash, stocks, bonds, real estate, or commodities.
Step 3: Calculate the percentage of each asset class in your portfolio. For example, if you have $100,000 total in your portfolio and $30,000 is in bonds, that’s 30%.
You can also use Excel formulas to help with these calculations.
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3. Use a Tool or App: There are some tools available to help you determine your asset allocation. Many of these require you to input your investment holdings. While some are free, many are not. One option I recommend is Morningstar, which allows you to enter your investments and get a detailed breakdown of your asset allocation.
4. Consult a Financial Advisor: If all this sounds overwhelming, consider working with a financial advisor. We have tools that can easily calculate your asset allocation, especially if you have multiple accounts or investments. An advisor can help ensure your allocation is on track for your goals and provide guidance on any necessary adjustments.
Closing Thoughts
When it comes to managing your portfolio it is crucial to consider your asset allocation. Not only will a proper allocation allow you to reach your financial goals faster, you will also be doing them at a level of risk you are comfortable with.
For example, if you consider yourself a risky investor who is comfortable seeing large fluctuations in their portfolio then, an asset allocation heavily leaning towards stocks might be your best bet. But if you are closing in on retirement or already in retirement then an allocation that is heavier on the bond side might be a smarter plan that also brings you some peace of mind.
If you have a question or topic that you’d like to have considered for a future episode/blog post, you can request it by going to www.retirewithryan.com and clicking on ask a question.
As always, have a great day, a better week, and I look forward to talking with you on the next blog post, podcast, YouTube video, or wherever we have the pleasure of connecting!
Written by Ryan Morrissey
Founder & CEO of Morrissey Wealth Management
Host of the Retire with Ryan Podcast