The Importance of Asset Allocation
- Peyton Widen
- Oct 14
- 2 min read
You may hear lots of people talk about asset allocation when it comes to investing. But what actually is it? Asset allocation is just a fancy way of saying how you split your money between different types of investments. The percentage of different types of investments in your entire portfolio makes up your individual asset allocation. How you allocate each type of investment is based on a variety of factors like age, risk tolerance, life goals, etc.
The main categories of your allocations you see are mainly stocks and bonds. Stocks are when you own fractional shares of a company. The value of your stock investments can make you a lot of money, but they can also go up and down quickly. Because of the volatility of owning a stock, the higher percentage of stocks that make up your portfolio the riskier your portfolio is. Bonds are loans you give to companies or the government that they usually pay you back over time with interest. Bonds are a lot safer based on the low interest rate you will receive but a lower chance of the value of your bond going down. Another important part of your allocation is cash. This is usually a smaller percentage of people's allocation. This is because cash returns are negligible and may not keep up with inflation over the long term.
How you mix the percentage all depends on people's own situation. If you’re young and have more time while saving for retirement, you might take more risks with a higher percentage in stocks because you have time to recover from the downs and time to capture the long-term gain in the markets. If you’re older or saving for something soon is when you might want your money in more bonds or cash to keep your money safe. These general rules don’t apply to everyone as people’s risk tolerance at certain ages vary.
Asset allocation will play more of a role in your investment results than the specific stocks or bonds you are invested in. It’s also smart to check your investments every once in a while to make sure they’re still balanced the way you want. Asset allocation isn’t always about picking the perfect investment, it’s about finding the right mix for you.
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