Asset allocation: finding your perfect fit
In the world of investing, there is no one-size-fits-all solution. Instead, your portfolio should fit your financial goals like a well-tailored suit or dress. Choosing an asset allocation is the first step in this process.
Balancing stocks and bonds based on your goals
Determining your ideal mix of stocks, bonds, and other asset classes helps you tailor a portfolio to your personal risk tolerance and goals. For instance, if you’re saving for a house in five years, your ideal asset allocation will be different than the allocation of someone saving for retirement. Similarly, an investor in her 20s will have a different ability and willingness to tolerate risk than someone close to retirement.
Show me the numbers
This chart shows hypothetical asset allocation portfolios of stocks and bonds over the past 15 years. It shows that a portfolio of 80% stocks/20% bonds yielded the greatest financial return over a year but came with the greatest risk (as measured by standard deviation). An allocation of 60% stocks/40% bonds decreased the annualized return by only a little while reducing the risk to a more comfortable level.
As this chart shows, different allocations offer different potential for risk and reward.
Someone with a higher tolerance for risk might choose an allocation of 80% stocks/20% bonds, while, on the other end of the spectrum, someone with limited tolerance for risk might choose an allocation of 20% stocks/80% bonds.
Selecting the portfolio allocations that fit your needs like a glove can increase your odds of financial success.