Here’s the next installment of my series on New Year’s Resolutions that can be done today, and not put off for “some day” in the future. We all know how that usually turns out…
Last year was definitely a roller coaster year when it came to the stock market, and you may have taken the “just don’t open the scary statements” solution. Well, it’s time to take a peek and see where you stand. I won’t pretend that recent performance has been great, but if you made regular contributions throughout, you may be surprised to see your portfolio balance higher than it was in 2007. (Maybe.)
Asset allocation is how your investments are split between different asset classes. The most generic examples are stocks and bonds, but you can also divide them further into categories like large companies vs. small companies, international vs. domestic stocks, or different safety grades of bonds. Other asset classes include real estate, commodities, or precious metals. Your mix of assets has a great impact on the volatility and expected future return of your portfolio.
The easiest way is gather all your most recent financial statements and plug your holdings into the Morningstar Instant X-Ray tool.
(If you want it to remember your portfolio, you must sign up for a free site membership.) The site will then “x-ray” your holdings and break it down by asset class:
How do I know if my asset allocation is correct?
Well, ideally you would already have set your target asset allocation, and all you would need to do is to rebalance your assets to that target. Rebalancing is a way to maintain the risk/reward balance that you have chosen for your investments, and also forces you to buy temporarily under-performing assets and sell over-performing assets (buy low, sell high). How often one should re-balance their portfolio depends on a few factors. See this post on How often should I rebalance my portfolio?
Otherwise, setting an asset allocation can be a very complex topic. I recently pondered a very general rule-of-thumb where you set your stock percentage to double your tolerable loss in one year. So if you could only stomach a 30% stock, you should only invest a maximum of 60% of your portfolio in stocks.
Here’s a big collection of my posts that I did when deciding on my own target asset allocation:
Simplified Theoretical Stuff
- Disclaimer and General Philosophy
- Consider Simply Buying The Entire Market
- Efficient Frontier and Modern Portfolio Theory
Choosing An Asset Allocation
- Deciding On The Stocks/Bonds Ratio
- Deciding On The Domestic/International Ratio
- Considering The Diversification Benefits Of Small and Value Stocks
- Equity Asset Allocation: Comparison of 8 Model Portfolios
- Investing In Real Estate Through REITs?
- Interim Target Asset Allocation: Looking Back & Some Decisions
…See the rest of my 2010 Instant New Year’s Resolutions here!
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I really need to work on this – I read The Intelligent Asset Allocator by Bernstein (great book!) last fall but need to do the last push and actually figure out my asset allocation and adapt my portfolio accordingly.
There are a lot of different asset allocations touted by the experts. There is “the largest return”, the “safest”, and everything in between.
Decide what you believe is best for you, based on your own thoughts, tempered with data from the experts.
keep your asset allocation in line with a portfolio rebalancer program, an Ehow article on it, or excel, based on how savvy you are.
The asset allocation in the example you provided looks eerily similar to my Vanguard Target Retirement 2035 account (VTTHX). If you’re not using this Vanguard account, what are you investing in and what’s your expense ratio?
How does the site allow a 2nd free X-ray on a saved portfolio? Once the portfolio is created the “X-Ray” link turns into an offer for a free trial of their premium (paid) service and there does not appear to be any way to import a saved portfolio into the free X-Ray service.
@Nuts – Yes, I just chose VTTHX, partially because I forgot what it held. Not a large allocation to international, but I guess switching now might seems like performance chasing.
Here’s my portfolio allocation, although I need to update it:
https://www.mymoneyblog.com/my-retirement-investment-portfolio/
@Steve Bonds – Here is a link on some ways you can access more features via T. Rowe Price website (free).
https://www.mymoneyblog.com/archives/2009/05/access-morningstar-x-ray-portfolio-management-tools-for-free.html
Jonathan,
What is your expense ratio?
What happened to the net worth updates?
When I use the xray calculator, should I include emergency fund, cash in my regular checking account, and any dedicated savings accounts (i.e. $5k saved up for downpayment on a new car which I’ll buy 2 yrs from now)
Thanks for this article. I reviewed mine today!
It is amazing to me how many people do not really know what is in their investment portfolio and then are upset when they loose a large percentage of thier investments.
A study conducted by Brinson, Singer, and Beebower in 1991, revealed that the most important determinant of portfolio performance was Asset Allocation;91.5% of an investor’s ultimate return is due to the way the assets are put together (or diversified) in the portfolio.
Thanks for highlighting the importance of asset allocation. Once you’ve selected your asset allocation, its key to make sure your optimize your underlying investments by making smart investment decisions and to re-balance periodically. Many people forget to re-balance which negates the effect of the initial work and thought they may have put into their asset allocation in the first place.