Asset allocation

Before you rely on it

What to check

Total the real exposure across every account, including a workplace plan and whatever a target-date fund holds internally.

The common error

Where people go wrong with asset allocation

Reading one account in isolation. Someone runs an aggressive brokerage account and calls themselves aggressive, while the 401(k) holding four times as much sits in a conservative default fund nobody has looked at since enrolment.

Worked through

Asset allocation in plain numbers

Start with $100,000 split 60% in stocks and 40% in bonds, so $60,000 and $40,000; a strong year lifts stocks 20% while bonds stay flat. Stocks are now $72,000 and bonds $40,000, for $112,000 in all, and the stock share has drifted to 64.3%. Nothing was decided, yet the portfolio is riskier than planned. To return to 60/40, sell about $4,800 of stocks and buy bonds with it: 60% of $112,000 is $67,200. The mix you set matters more over a lifetime than which fund you pick inside each part.

Easily confused

Asset allocation and its neighbours

Asset allocation is not diversification, though people use the words as if they were twins. Allocation is the split between broad classes such as stocks, bonds and cash. Diversification is spreading within a class and across exposures so no single holding dominates. You can be well allocated and poorly diversified, for example 60% in stocks made up of one company's shares; it also differs from asset location, which is which account holds which asset. And it is not market timing, which changes the mix in response to forecasts.

In real decisions

Where asset allocation turns up

The mix largely decides how bumpy the ride is and how much growth you can expect; investors set an allocation from their goals and time horizon, then hold to it. Target-date funds shift it gradually over time; retirees lower stock exposure to protect against a bad early sequence of returns. Advisors review allocation once or twice a year and rebalance when it drifts. It is also how an employer plan menu is best read: not as a list of funds but as a set of building blocks.

Know the edges

Where asset allocation stops being reliable

Allocation models rest on assumptions about returns and correlations, and those change. In a crash, assets that usually move apart can fall together; a fixed rule such as 60/40 does not fit everyone. Your job security, other assets and comfort with losses all matter. Very long time horizons can justify more risk, but only if you can actually hold through the declines; a calculator shows the arithmetic of drift. Suitability is a personal judgment, often worth discussing with a qualified professional.

Quick answers

What people ask about asset allocation

How often should I check my allocation? Once or twice a year is usually enough, plus after big life changes. Checking daily invites reacting to noise. Set a rule for how far the mix may drift, and rebalance when it does.

Is a 60/40 mix right for everyone? No. It is a common reference point. Age, income stability, time horizon and comfort with losses all change the answer. A person ten years from retirement and a person thirty years away can reasonably choose differently.