What Is Portfolio Allocation, And How Do I Achieve It?

Posted Apr 6, 2020


Portfolio allocation is one of the main components of portfolio construction. Understanding how positions should be allocated across a portfolio can help ensure that an investor is not overly exposed to one position that could potentially do significant damage to the portfolio.

For many people, a financial planner or investment advisor helps in determining an investor’s portfolio allocation. These discussions help to decide the appropriate amount of exposure to stocks, bonds, real estate, and more for the investor based investment objectives, risk tolerance, and life stage. 

In general, younger investors will often have heavier allocations to more risky but higher-returning assets such as stocks. An example might be 80% invested in stocks, and 20% invested in bonds. Conversely, older investors may aim to reduce volatility so they can generate stable income from their investments. In other words, allocate more of their funds to bonds and mutual funds instead of individual stocks. Of course, some investors, regardless of age, may prefer heavy allocations to stocks.

At Realized, we look at real estate with a similar mindset. We assist clients by helping them create a portfolio of diverse, institutional-quality real estate properties that qualify for a 1031 exchange. When we help clients construct a portfolio, there are a few main things we consider.

Size Of Exchange

In regards to the dollar amount, our offerings typically have minimum investment requirements. The amount the client is considering reinvesting will impact the number of total offerings they are able to invest in. 

Long-Term Goals

Most of our clients plan on maintaining passive investments going forward but, every now and then, we come across someone who may want to go back into direct real estate. For those individuals, we recommend they don’t spread the investment too thin. It’s very unlikely that multiple offerings will roll over at the same time — if you have $1M and divide that into ten Delaware Statutory Trusts (DSTs) at $100K each, it’s unlikely more than one of those will be sold at the same time. That means if you want to go back into direct property, you’ll likely only have $100K at a time, and buying a $100K property may not be what you’re looking for. But if you plan to stay passive and keep exchanging into more DSTs in the future, then it will be more beneficial to build a diverse portfolio allocated across property types and locations. 


Just as equity portfolios can be diversified, so too can real estate portfolios. Diversification can be a great way to manage risk by spreading your investments across different property types, geographical locations, and sponsors. Diversification also helps reduce the risk exposure of any single asset. If one asset experiences a significant decline in value, the impact on the overall portfolio is reduced because of the smaller allocations to individual investments. Plus, other properties within the portfolio may remain stable or even increase in value, offsetting some of the downside. Diversification is an excellent tool to help manage the volatility of the overall portfolio. 

The type of diversification an investor chooses depends on their risk tolerance. A more conservative investor will most likely be looking for quite a bit of diversification. Whereas, an investor with a higher risk tolerance may be comfortable having a high concentration of their portfolio in a single asset.

Risk Tolerance

Risk tolerance is an investor characteristic that defines how much volatility an investor is willing to take on in their portfolio. It also determines if the investor is inclined to take on investments with more risk and potentially higher returns or target more conservative investments that have lower risk and lower returns.

At Realized, we recognize that each investor is unique with their own investment goals and risk tolerances. We work very closely with our investors to construct a portfolio of real estate investments that is designed to meet those objectives while staying within their risk tolerance.

This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.

Diversification does not guarantee a profit or protect against a loss in a declining market.  It is a method used to help manage investment risk.

There is no guarantee that the suggested asset mix will appropriately reflect your ability to withstand investment risk.

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