Ways to Allocate Assets in a Portfolio

Asset allocation is all about allocating your investments among different asset classes and diversifying your portfolio to potentially minimize risk, strive for a higher return, and work towards your investment goals. How you allocate your assets depends on how much risk you are willing to take and the amount of risk you can take to achieve those goals within a certain timeframe. 

What Is Asset Allocation?

Asset allocation is essentially not putting all of your eggs in one basket. It means spreading your investments across various asset classes in your portfolio to minimize risk. There are three major asset classes, including:

1. Equities (stocks)
2. Fixed-income (bonds)
3. Cash or cash equivalents, such as money market funds

However, there are also alternative asset classes, such as commodities, real estate, and art. 

An investor’s portfolio distribution will depend largely on your personal goals, investment horizon, and your level of risk tolerance.  

Time Horizon 

The time horizon depends on the number of months or years that you plan to invest to achieve a particular investment goal. If you have a longer time horizon, you may be able to weather the ups and downs of the market by taking on more volatile investments. On the other hand, if you have a shorter time horizon, making riskier investments may not be your best option. 

Risk Tolerance

Your risk tolerance is your ability or willingness to lose some or all of your original investment in hopes of receiving a higher return in the future. Aggressive investors may take on more risk for better return potential, whereas conservative investors may withhold their portfolios for more secure assets. 

Model Portfolios for Asset Allocation

To help with the asset allocation process, investment companies may create model portfolios for their clients, each made up of different proportions of asset classes to satisfy different levels of risk tolerance.

Conservative portfolio

A large percentage of investments in a conservating portfolio, also known as capital preservation portfolios, may be allocated to lower-risk securities, such as bonds and money market securities, over stocks. If a conservative portfolio includes stocks, they are usually stable and well-known companies (blue-chip stocks) that are less likely to experience market ups and downs. 

Investors who choose a more conservative portfolio usually prioritize preserving their capital over maximizing their returns. 

Moderately conservative portfolio

A moderately conservative portfolio is an option for investors who wish for their assets to grow, but do not like the idea of taking on larger risks. Moderately conservative portfolios are a mix between stocks and bonds, with more limited involvement in the stock market. Alternative assets may also be part of a moderately conservative investment portfolio.

Moderately aggressive portfolio

Moderately aggressive investment portfolios are much more balanced, as assets are almost equally divided between fixed-income securities and equities. This is a better option for investors with a longer time horizon (more than five years) with medium risk tolerance.

Aggressive portfolio

Aggressive investment portfolios are mainly equities, which can be very volatile, along with some fixed-income securities. Aggressive portfolios are focused on the long-term growth of capital rather than the preservation of the original investment. 

An aggressive investment strategy may also need more active management. It may involve a high turnover strategy by chasing stocks that show higher performance in a shorter time period.

Very aggressive portfolio

A very aggressive investment portfolio will be comprised almost entirely of stocks with a goal of strong capital growth over a long period of time. This type of portfolio contains considerable amounts of risk, meaning there’s a chance that you could lose more than you could gain. 

Choose What’s Right for You

Asset allocation allows investors to reduce potential risk through diversification. A general rule is that the longer your time horizon, the more you can focus on growth in your portfolio because you have more time to make up for any market downturns. You can model your portfolio to suit your own needs and make adjustments when necessary.