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Become a Master Yogi of your Investments

Updated: Aug 17

An easy guide to understanding you asset allocation and mastering your investments

Person in clouds balancing money and the Pocketnest app

Just kidding. You don't have to be a yogi to balance your finances. Turns out, you just have to make a few decisions. No pretzel positions necessary. We’ve been around the investment block a time or two (thousand). And we can tell you: advisors love the term “asset allocation.” We throw it around like it’s as common as a Dave Matthews Tour. Why? Well, because it’s pretty darn useful.

What is "asset allocation"?

Asset allocation is when you play the risk-reward tightrope of investing. The idea is that you adjust the percentage of each asset in your investment portfolio to balance out the potential risks with the potential rewards. You’ll noodle with each asset allocation according to how much you’re willing to tolerate risk, what your goals are and how long you plan on investing.

So, what does that look like in your portfolio?

Asset Allocation is basically about stocks vs. bonds. You can identify your risk by measuring the percentage of stocks versus the percentage of bonds in your investments. Stocks and stock funds are riskier and therefore more volatile than bonds and bond funds. If you hold investments made up completely of bonds and bond funds they’ll fluctuate less than if you hold investments made up completely of stocks and stock funds.

What does this mean for you?

As a general statement, bonds are safer investments than stocks and therefore, have lower average returns. Consider how risky you’re willing to be, what your goals are and how how long you plan to invest before you make any fast moves.

Your action plan

1. We think that’s all there is to understanding asset allocation. If you’d like to read more, here is a good resource from Vanguard.

2. Check your overall investment allocation to determine how much you have in stocks/stock funds and how much you have in bonds/bond funds.

  • You can do that easily if all of your investments are with one manager (either an advisor, or a robo-advisor). They should be able to report that for you easily.

  • You can manually figure out your allocation by looking up each position on Morningstar to see if it’s classified as a stock or bond (some funds have both and Morningstar will show you the breakdown of the fund in between the two).

  • Our recommendation is to integrate your accounts into a platform that can show you this data on an ongoing basis. Our favorite platform for this is Personal Capital. Once you integrate all of your accounts, you can view your overall portfolio allocation mix at any moment.

3. Lastly, determine if the mix is right for you. Find your allocation below. Does it seem reasonable to you? Does the average return seem like what you hope to make in the markets? Could you stomach the worst year loss (keep in mind it is a “paper loss” that would come back if the market comes back) or will you sell all of your positions in fear? For example, based on the chart below, if you have a 60% stock / 40% bond mix on average, Vanguard says this portfolio has had a 5.5% real return annually, but in the worst year, the portfolio was down 26.6%. How does that resonate with you?

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