Loot LassoRebalancing 101 · Article 3 of 5
Understanding Portfolio Allocations: Balance Your Risk
What is portfolio allocation?
The first step in building or rebalancing a portfolio is choosing your desired allocation: how your money is divided across asset classes.
Common asset classes include:
- Stocks
- Bonds
- Real estate
- Currencies
- Digital assets
- Other alternative investments
Your allocation sets the weight of each asset class in your overall portfolio.
Spreading money across asset classes brings stability. Different assets react differently to market conditions: some do well while others lag. Combining them thoughtfully smooths out your overall returns and lowers your risk.
- Cash
- Government bonds
- Corporate bonds
- Real estate
- Stocks
- Crypto
How do I choose my allocation?
The right allocation is a personal decision. It depends on many factors, including your:
- Age and life expectancy
- Risk tolerance
- Family situation
- Job stability and income
- Personality
- Lifestyle and cost of living
- Other personal and financial goals
Here are a few of the biggest considerations.
Age and life expectancy
In general, younger investors can afford more risk. With a longer time horizon, they have time to recover from downturns in volatile assets like stocks or digital currencies.
As retirement approaches, the focus often shifts to protecting what you've built and creating steady income. With less time to recover from losses, many investors move toward more conservative allocations, usually with more bonds or dividend-paying investments.
Personality and risk tolerance
Some people can watch their portfolio drop 10% or more in a short time without worry. Others find that kind of swing stressful enough to lose sleep or make impulsive decisions.
Risk tolerance can change over time. A single, younger investor might be comfortable with a high-risk allocation, but that comfort may shift as they get older, take on dependents or face other life changes.
Revisit your allocation from time to time to make sure it still fits your life and your comfort level.
How much can you afford to lose?
Risk tolerance is financial as well as emotional. Someone with significant savings, a stable income or family support can usually handle a more aggressive portfolio.
Someone without those safety nets may need a more conservative approach, because losses would hit their quality of life or future plans more directly.
Sample portfolio allocations
Here are sample allocations from very conservative to very aggressive. For simplicity, they use a three-fund structure of U.S. stocks, international stocks and bonds. Learn more about three-fund portfolios.
| Allocation | U.S. stocks | Int'l stocks | Bonds | Mix |
|---|---|---|---|---|
| Very conservative | 20% | 10% | 70% | |
| Conservative | 40% | 10% | 50% | |
| Balanced | 50% | 10% | 40% | |
| Growth-oriented | 70% | 10% | 20% | |
| Very aggressive | 90% | 10% | 0% |
More advanced allocations might also include:
- Stock subcategories, such as large-cap, small-cap or specific sectors
- Different bond types, such as corporate, municipal or government
- Real estate, commodities or digital assets
- International and emerging-market investments
Historical performance: stocks vs. bonds
Over long periods, more aggressive investments like stocks have delivered higher returns. Individual stocks rise and fall, but stocks as a whole have historically outperformed bonds over the long run. The tradeoff is bigger swings along the way.
Past performance does not guarantee future results. Every investment carries risk, including the loss of money you invest.
Whatever allocation you choose, the Loot Lasso calculator can help keep your portfolio on target.