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Become a Master Yogi of your Investments

Updated: 1 day ago

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

Person in clouds balancing money and the Pocketnest app

When we say "balance" you may be thinking about your most recent tree pose and tadasana. But, you don't have to be a master 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: financial professionals 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 consider the risk-reward tightrope of investing. The idea is that you adjust the percentage of each asset in your investment portfolio to balance against potential risks with 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?

When overly simplified, asset allocation is traditionally 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 tend to be riskier and therefore more volatile than bonds and bond funds. If you hold investments made up completely of bonds and bond funds they’ll likely 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 tend to carry less risk 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. Like all things personal finance, having a plan and being intentional about your asset allocation is the first step.

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 "easy-ish" if all of your investments are managed by one financial or investment company, manager or adviser. They should be able to report that for you easily. There are many digital tools that can help you see the breakdown between stocks and bonds in your portfolio.

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

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? Are you hanging on tight for what's coming next or running for the hills?


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