Asset Allocation: The Most Important Investment Decision You'll Make
Asset allocation is the practice of dividing your investment portfolio among different asset categories, such as stocks, bonds, and cash. It is widely considered the most important factor in determining the overall risk and return of your portfolio—even more than the specific investments you choose.
The Core Asset Classes
- Stocks (Equities): Represent ownership in a company. They offer the highest potential for long-term growth but also come with the most volatility (risk).
- Bonds (Fixed Income): Are essentially loans you make to a government or corporation. They are generally less risky than stocks and provide a steady stream of income.
- Cash & Cash Equivalents: Includes savings accounts, money market funds, and short-term CDs. They are very low-risk but also offer the lowest potential returns.
The goal of asset allocation is to create a mix that aligns with your financial goals, risk tolerance, and time horizon.
How to Choose Your Asset Allocation
Your ideal mix will change over your lifetime. Here are two common rules of thumb:
- The 110 Rule: A simple guideline is to subtract your age from 110. The result is the percentage of your portfolio you should allocate to stocks. For example, a 30-year-old might have 80% in stocks (110 - 30) and 20% in bonds.
- Time Horizon: The longer you have until you need the money (e.g., for retirement), the more risk you can afford to take. A young investor should have a higher allocation to stocks for growth. As you approach retirement, you should shift more towards bonds and cash to preserve your capital. As Fidelity explains, your personal financial situation and risk tolerance are also key factors.
Let Moneko Guide Your Strategy
- Determine Your Risk Tolerance: Not sure where to start? Our AI-Powered Goal Creation includes a questionnaire to help you identify your risk tolerance.
- Get a Personalized Plan: Based on your profile, the Moneko AI Financial Advisor can recommend a sample asset allocation to serve as a starting point for your investment strategy.
- Track Your Portfolio: Connect your investment accounts to the Moneko Dashboard to see a holistic view of your asset allocation and track its performance over time.
Disclaimer: This content is for informational purposes only and does not constitute financial advice. All investment decisions carry risk. Conduct your own thorough research or consult a qualified financial advisor.