I’m tearing up, distract me, what’s asset allocation? 

Asset allocation is a specific kind of diversification, where you spread your cash across different asset classes, like stocks, bonds, and Crazy Bones. 

So why do this? Seems like a hassle? It can be, but it’s important. Without proper asset allocation, your portfolio could be out of line with your goals! Then you’d never get that highly-necessary $100k bottled water. 

An analogy: if you want to make a cake (literally never done this, so this is a guess) you can’t just mix a bunch of sugar, chocolate, and butter in a bowl and hope for the best (probably?)! You need to mix them in the proper ratios to make sure you end up with that Momofuku birthday cake, and not one of these abominations. 

Ok, I sort of get it. But why is this good?

Asset allocation helps your investment portfolio in a few ways:

1. Diversification: Different asset classes, like stocks, bonds, gold, and, yes, CRAZY BONES, behave differently depending on what’s happening in the markets. Gold and bonds may be more valuable when investors are nervous, stocks usually go up when people are feeling good and have lots of money, Crazy Bones are the foundation of our economy.
   

   

   Source: crazybonespedia.com

2. Risk to your taste: Everyone has different levels of risk they’re comfortable with. Personally? Oh, thank you for asking. I’m the type of guy who puts his entire net worth into a meme stock/coin entirely based on if the name makes me laugh. I’ve also filed for bankruptcy thrice by age 32, so my track record is poor. Other (rational) people prefer to balance stocks with gold with bonds and MAYBE some risky stuff like crypto on the edge.
   

3. Keep your goals on target: By carefully mixing different asset classes in your portfolio, you can stay on track for your goals. If your goals are far away, having more stocks is good! But if it’s to buy your fiancee an engagement ring in two weeks, maybe don’t risk it all on LOAF CAT (actual name of a crypto). 

Heard. Now how do I allocate my assets, your grace?

Binge-watching The Gentlemen? Same. 

1. Know your limits: How much risk are you comfortable with? What if your investment account went down 30% next month? Would you look like:

 OR  

Your answer will determine how comfortable you are taking risk.

2. Build accordingly: Once you know how much risk you’re comfortable with and what you’re investing for, build to match! If it’s a far away goal and you’re okay with some volatility, stocks are a good bet. If you’re more like the Potter on the right above, best to stick to a bit more bonds.
   

3. Keep your portfolio in line: Markets move! Portfolios usually aren’t set-it-and-forget-it. So, check in occasionally to see if you need to bring your portfolio back in line with where you set it. 

Not that hard? Right?

Congrats! You’re now a graduate and an asset allocator.

Asset allocation is important. Everyone needs something a bit different, depending on what they’re comfortable with and what they’re saving for. 

Retiring in 25 years? Stocks are a good idea. Buying a house in five? A balance of stocks, bonds, and cash is a good fit. Selling all your possessions to buy LOAF CAT? I can’t help you. 

Know what you’re comfortable with, build a portfolio that matches this, and keep an eye on it. 

Ta. 

Bonus

Skim: What is asset allocation?
Go on: What is asset allocation? How can it impact your investment portfolio?
Deep dive: An Asset Allocation Puzzle