When you start investing, you need to have a plan. How much of your money do you put into different asset classes? Answering this question leads to your asset allocation. It should be describing how you want to split your money between the 3 main asset classes:
Equity // Fixed Income // Cash equivalents
The ideal asset allocation is a highly individual question and can not be answered for every human being in the same way. If you are risk averse and do not like big movements in your portfolio, bonds and cash are the way to go. If you have a long investment horizon and you are willing to take high risks, then stocks should be weighted high in your asset allocation.
0 // 0 // 100 – People, why do you do this?
This asset allocation will not gain any returns. Cash equivalents suffer from inflation.
Recommended for: People who plan to die soon and want to have some fun before that.
20 // 60 // 20 – The wealth freezer
This will not make your rich. But it will probably beat inflation.
Recommended for: Retiree’s who worked 45 years enjoying their last years without worries
40 // 50 // 10 – Solid but boring
Holding to this allocation long term, you will see your investment grow. But it will grow slow.
Recommended for: Risk averse people who want to get some returns instead of keeping their money in a bank account
60 // 30 // 10 – The Allrounder
If you do not know what you want, do this.
Recommended for: Lazy people
80 // 15 // 5 – The wealth builder
The 15% bond and 5% cash allocation will provide a small cushion in big market crashes, while the equity allocation will make the heavy lifting to deliver good returns.
Recommended for: People who want to retire with 35 after achieving to save 25x their annual expenses, High networth individuals
100 // 0 // 0
You might lose 60% of your money very fast. In the past (before 2020) this has delivered 7-8% of annual returns on average.
Recommended for: Risk junkies, People saving more than 50% of their income, Everybody under 30
Your asset allocation does not have to be fixed over your whole lifetime. Adjust it to the risk you feel comfortable to carry at each stage of your life.
Use the right tools to keep track of your asset allocation. Rebalance your portfolio once a year to fit to your asset allocation.