Do You Know Your Asset Allocation?

There are two extraordinarily important questions every investor should be able to answer right away:

  • What is your current asset allocation?
  • What are you paying in fees?

Since this article is about asset allocation, we’ll focus on question #1. It may sound harsh, but if you don’t know your current asset allocation, you’re not being a diligent steward of your money – period. If you’re a do-it-yourself investor and you don’t know your asset allocation, shame on you. If you work with a financial advisor and you don’t know your own asset allocation, shame on both of you. Yes, it’s that serious!


What is Asset Allocation?

Every investment can be assigned to a particular asset class. The major asset classes are stocks, bonds and cash. From there, the major asset classes can be broken into sub asset classes such as US large company stocks, international small company stocks, commodities, government bonds, and so on.


Asset allocation refers to how an investor’s assets are allocated across various asset classes. What percentage of your assets is invested in stocks vs. what percentage is invested in bonds?


This applies to all assets, not just that are inside an investment portfolio. For example, if you have zero dollars invested in an investment portfolio or 401k but you own your home, your asset allocation is 100% residential real estate.


Generally speaking, a portfolio more heavily allocated to stocks (i.e. 90% stocks, 10% bonds) is considered more risky and has a higher expected return. Conversely, a portfolio consisting of (10% stocks, 90% bonds) is more conservative and has a lower expected return. An investor’s asset allocation should reflect his or her unique ability, willingness and need to take risk.


Risk – Investor’s Ability and Willingness & Need

An investor’s ABILITY to take risk refers to time horizon. How long does the investor have before they need to withdrawal their funds? A younger investor has a greater ability to take risk than an older investor because there is more time to recover in the case of a major downturn.


WILLINGNESS to take risk refers to a “gut check.” Do you have the stomach to not only watch your investment portfolio decrease by 40 or 50 percent, but also to add to it during those downturns? If the answer is no, then you have a lower willingness to take risk and should perhaps have a more conservative asset allocation.


Finally, the NEED to take risk is all about achieving financial goals. If every financial goal you’ve ever dreamed of can be hit by keeping your cash stashed under your mattress, then by all means go for it. In this case, the need for a higher investment return is low so why take the risk? This is a bit facetious but on the flip side, there are too many Americans who have already hit their financial goals, but still have a very aggressive asset allocation. My question is…why? They’ve already won the game and their need to take risk is low – think baby boomer uncle who “lost it all” just before he was going to retire in 2009.


Investor’s should carefully and thoughtfully assess their unique ability, willingness and need to take risk before landing on an asset allocation. It’s equally important for investors to continually check-in with themselves and update their asset allocation as life evolves.


Next Steps:

If you don’t know your current asset allocation, here are a few things to do:

  1. Put your current asset allocation on paper
  2. Evaluate it against your ability, willingness & need to take risk
  3. Re-balance your asset allocation to align with your goals and appetite for risk.


ChrisG-P_x2A guest post by Christopher Girbes-Pierce, CFP, the Founder of Enlightened Wealth Management, a RIA that provides fee-only financial planning and investment management services for tech savvy, socially conscious entrepreneurs and professionals across the US. Chris is a member of the XY Planning Network and Financial Planning Association.


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