This is where the rubber meets the road as far as getting your investment portfolio diversified.
Asset allocation refers to the mix of investments you hold between different assets – equities (stocks), fixed income (bonds), real estate and cash – that fit your goals and risk level. A sound asset allocation strategy ensures your investment portfolio is diversified and aggressive enough to generate optimal returns without taking unnecessary risk.
Choosing the appropriate asset allocation is purely a personal thing and it depends on your current financial situation, investment objectives, investment horizon and level of risk tolerance. As such, it is certainly something that would evolve as you move through different stages of your life.
However, you can use the following rule of thumb – subtract your age from 100 and put the resulting percentage in stocks and the rest in fixed income securities. To further diversify within asset classes and into real estate, you can do the following;
- Invest 10% – 25% of the allocation to stocks in international equities. The younger you are, the close you should move to the upper band.
- Take 5% each of your stock and fixed income portfolio and invest the resulting 10% in real estate.
For some people this seems too conservative. Hence, the modified rule of thumb suggest that you may instead subtract you age from 110, to get your stocks allocation and continue as above.