Maintaining the proper asset allocation over time is one of the three keys to investing success over the long term. The reason is simple: over time, your ideal portfolio gets out of whack because some investments do better than others.
For example, if you were looking at your portfolio like I did last year, you would have noticed that your large cap U.S. stocks outperformed most other investments in your portfolio. As a result, you could be really out of whack in that sector this year. You may not think it matters - don't sell your winners - right? Well, what happens if the U.S. stock market corrects 10% this year? Then, instead of locking in gains, your new 51% of your portfolio would take a larger hit than necessary.
That's why asset allocation is key!
Why Most Investors Fail At Asset Allocation
But I bet you - even if you are diligent about selecting a proper asset allocation - you are still failing at maintaining a truly balanced portfolio. The problem?Multiple investment accounts. The truth is, over time, most investors simply build up multiple investing accounts, and so truetotal portfolio asset allocationbecomes difficult.
Let's look at what can accumulate over time:
- Traditional Brokerage Account
- Roth IRA (see Best IRA Accounts)
- 401k (and you could have multiple of these as you change employers)
- SEP IRA (or solo 401k, or SIMPLE IRA)
- Real Estate (like RealtyMogul)
Now tell me this - are you really maintaining a solid asset allocation across all of these random accounts? Probably not.
But let's fix that right now.
Using Free Tools To Help
There are two free things that you can do right now to help. I've done both, and I'll share which one I prefer.
You can also check out our guide to portfolio analysis tools here.
Setting Up an Excel Spreadsheet
First, you can useExcel. Typically, if I'm helping someone put together the asset allocation for their portfolio, I'll use an Excel spreadsheet to balance out the various accounts. I was recently helping a family member, and they had a traditional brokerage account, 2 traditional IRAs (one for each spouse), 2 Roth IRAs, a pension for each of them that they would need to roll over, and then the basic checking and savings accounts. It can be daunting.
To illustrate this, I've attached my sample spreadsheet: Asset Allocation Spreadsheet. It's free, so download it and check it out.
The trouble with this method is that mutual funds and ETFs can sometimes be hard to dissect. You really have to dig in and figure out what the allocation is, because many mutual funds and ETFs are a mixed bag. You'll see in my spreadsheet how I split this up.
Using Empower For Your Accounts
The method I prefer is to use a free program like Empower (you can also use Mint, but it's not as powerful). Empower (formerly called Personal Capital) automatically connects all your accounts into one simple dashboard, and it then sets up what your current asset allocation is automatically. Then, it displays everything in a simple, easy to read dashboard:
From here, you can then look at modifying your portfolio to get to your target asset allocation. The only drawbacks of Empower are that you cannot assign asset classes to investments (that's where the unclassified sections comes from), and you cannot easily setup a target asset allocation. But Personal Capital is free, and it does this painlessly for you.
Read our full Empower review here.
Using Paid Tools To Help
If using Empower isn't enough for you, there are paid tools that can help you. My favorite paid tool is Quicken, which you can use to manage all of your accounts and money in one simple place.
Quicken makes up for everything that Personal Capital doesn't have - you can assign investments to asset classes, and it allows you to setup your personalized asset allocation. Then, it quickly shows you what positions you need to reduce and where you need to add - so that you don't have to do any guess work on your own. It even offers you suggestions on where you can improve your holdings as well:
Now, you can quickly see where you need to rebalance your portfolio and do it in the right way. There is also a calculator available that shows you the specific dollar amounts you need to change - so when it comes time to actually make the trades, you know what you need to sell and what you need to buy.
** It's important to note that Quicken is only helpful if you use the PC version. The Quicken for Mac version is terrible and can't help with this.
Final Thoughts
It's essential that you rebalance your portfolio - I recommend yearly, and use tax season as the prime time to do it so that you don't forget. It can be easy to forget to rebalance your portfolio, especially after a solid year of gains that make you feel a bit flusher. But, if you don't want to be poorer this fall, you need to rebalance now!
FAQs
One way to keep a portfolio balanced with future contributions is, when possible, to have your largest account hold funds in all three asset classes. Ideally, you are still contributing to this account so that you can rebalance with contributions as well as fund-to-fund exchanges, if necessary.
How do you manage all investments in one place? ›
Step 1: Visit the website of INDmoney or download the app on your phone. Step 2: Register your account and finish your KYC in a few minutes. Step 3: Enter all information about your investments in Indian and US stocks, Mutual Funds, FDs, EPF, NPS, PPF, and Bonds.
What are the 4 types of asset allocation? ›
There are several types of asset allocation strategies based on investment goals, risk tolerance, time frames and diversification. The most common forms of asset allocation are: strategic, dynamic, tactical, and core-satellite.
What is the ideal asset allocation strategy? ›
If you are a moderate-risk investor, it's best to start with a 60-30-10 or 70-20-10 allocation. Those of you who have a 60-40 allocation can also add a touch of gold to their portfolios for better diversification. If you are conservative, then 50-40-10 or 50-30-20 is a good way to start off on your investment journey.
What are the golden rules of asset allocation? ›
Set Your Goals Before Investing
Your asset-allocation should not change as per the expectation of returns from various assets. Rather, your asset allocation should be based on your investment objective, risk-appetite and the years left to achieve the financial goals.
What is the 72 rule in wealth management? ›
Do you know the Rule of 72? It's an easy way to calculate just how long it's going to take for your money to double. Just take the number 72 and divide it by the interest rate you hope to earn. That number gives you the approximate number of years it will take for your investment to double.
How do multi millionaires manage their money? ›
Many millionaires keep a lot of their money in cash or highly liquid cash equivalents. They establish an emergency account before ever starting to invest. Millionaires bank differently than the rest of us. Any bank accounts they have are handled by a private banker who probably also manages their wealth.
What is the ideal portfolio mix by age? ›
Investors in their 20s, 30s and 40s all maintain about a 41% allocation of U.S. stocks and 9% allocation of international stocks in their financial portfolios. Investors in their 50s and 60s keep between 35% and 39% of their portfolio assets in U.S. stocks and about 8% in international stocks.
What are the three main asset allocation models? ›
Income, Balanced and Growth Asset Allocation Models
We can divide asset allocation models into three broad groups: Income Portfolio: 70% to 100% in bonds. Balanced Portfolio: 40% to 60% in stocks. Growth Portfolio: 70% to 100% in stocks.
What is the best portfolio balance by age? ›
For example, if you're 30, you should keep 70% of your portfolio in stocks. If you're 70, you should keep 30% of your portfolio in stocks. However, with Americans living longer and longer, many financial planners are now recommending that the rule should be closer to 110 or 120 minus your age.
1 thumb rule of investing? Allocate 30% of your monthly salary to dividend investments for the benefit of future generations. Following that, distribute 30% equally between equity and debt components. Invest 30% of your retirement funds in debt schemes that generate income.
What is an aggressive portfolio allocation? ›
The Index-Based Aggressive Portfolio allocates more assets to mutual funds that mainly invest in equity securities (including real estate securities) than the Index-Based Moderate Portfolio, and the Index-Based Moderate Portfolio allocates more assets to mutual funds that mainly invest in equity securities (including ...
What is the most common allocation strategy? ›
The most widely used method for allocating scarce things, or resources, in a market economy like ours, is the price system. The price of things is determined by supply and demand.
How do I diversify my investment portfolio? ›
- Spread the Wealth.
- Consider Index or Bond Funds.
- Keep Building Your Portfolio.
- Know When To Get Out.
- Keep an Eye on Commissions.
While there is no precise answer for the number of funds one should hold in a portfolio, 8 funds (+/-2) across asset classes may be considered optimal depending on the financial objectives and goals of the investor. Further, higher allocation of portfolio to the right fund is of crucial importance.
What does an 80 20 portfolio mean? ›
The 80/20 Portfolio is a simple, balanced portfolio with an 80% equity and 20% fixed income allocation.
Is it safe to have all investments with one company? ›
That said, if you're transitioning into retirement, when you'll be living off your investments and savings and need detailed cash flow management, you may be better off partnering with a single dedicated firm to avoid unnecessary complications, he says.
What is the group of all your investments called? ›
Simply put, a financial portfolio, also called an investment portfolio, is a collection of financial assets. It may have stocks, bonds, cash and cash equivalents, alternative investments, life insurance, property or other assets.
Should I have all my investments with one financial advisor? ›
By choosing a single financial advisor, you can not only consolidate all your financial information but can also keep a tab on your investments. It reduces errors and oversight and makes it easier for you to follow through with the professional's advice.
How do you organize an investment group? ›
6 Steps to starting an investment club
- Find and organize members.
- Establish investing objectives.
- Pool investment funds using Braid.
- Formulate investing strategies.
- Select a legal structure for investing.
- Open a brokerage account.
