Portfolio Allocations
The first step in starting or balancing your portfolio is to determine your desired portfolio allocation. Portfolios are divided into categories of investments. The allocation of a portfolio is the relative value of each category to the entire portfolio. Categories of investments include stocks, bonds, real estate, currencies, digital assets, and many other investment types.
Diversifying a portfolio between various classes of investments brings stability to a portfolio. Each asset class provides differing levels of risk and also allows investors to benefit from excelling performance in one class of investments and shields from poor performance in another class of investments. By combining asset classes more reliable returns can be predicted.
How do I determine my allocation?
Determining your portfolio allocation is a complex process and is a personal decision. Your age, life expectancy, risk tolerance, family situation, employment prospects, personality, cost of living, and many other factors should be considered when determining your desired portfolio allocation.
Age & Life Expectancy
In general, younger individuals have more flexibility in their investment strategy. Younger individuals have more time to make up for losses due to a downturn in more highly volatile assets. As age advances closer to retirement and the remainder of your life expectancy shrinks, major fluctuations in you investment balances may not be as easily tolerated. Your dependency on consistent returns when you are unable to work for income or have hopes of retiring may result in more conservative choices.
Personality and Risk Tolerance
Some individuals have greater natural risk tolerance and will not think twice about seeing the balance of their hard-earned investment portfolio and net worth drop by 10% in a matter of a few weeks or months. Meanwhile, other individuals will lose sleep, worry constantly, and be prone to making panicked financial and life decisions by such changes. How you react to such changes may change over time. As a single independent person, you may opt for a heavy allocation of stocks and digital currencies without concern, but as you age, gain dependents, and experience other stressors and life circumstances, your risk tolerance may change dramatically. Plan to reevaluate your strategy over time to reassure yourself that you are comfortable with your current allocations.
How Much Can You Lose?
An individual with a large net worth, extended family wealth, high income employment, and/or significant inheritance may feel comfortable in setting and aggressive path for their portfolio because a loss of a significant portion of their investment portfolio may not impact their day-to-day life in the same way that a loss for someone without a lot of resources.
Portfolio Allocations
A sample of portfolio allocations is below. The samples range from very conservative to very aggressive. The chart is simplified to a 3-fund portfolio (Learn More About 3 Fund Portfolios Here) make-up and more detailed allocation strategies exist. These more detailed allocation strategies may involve further specification of the types of stocks (large, medium, or small companies or based on sectors of the economy represented), types of bonds (commercial, government, etc.), emerging market international opportunities, and other types of investments including real estate, digital assets, and other investment classes.
Over time, returns favor more aggressive securities such as stocks. Individual stocks may appreciate or depreciate in value, but collectively over a prolonged period, stocks have historically provide a more robust return than bonds. See sample allocations and returns from Vanguard.com below.
Data from Vanguard.com. Stock returns from S&P 90 (1926-1957) and S&P 500 (1957-present). Bond returns from S&P High Grade Corporate Index (1926-1968), Salomon High Grade Index (1969-1972), and Barclays US Long Credit Aa Index (1972-Present).
As with any investment, past performance does not guarantee future returns. Invest at your own risk.