Portfolio Allocation: What It Is & Factors That Affect It

Investors may often hear the term portfolio allocation and diversification used interchangeably to address one thing - limiting exposure to extreme highs or lows.  

The difference is more nuanced. The goal of portfolio allocation is to divide your budget across the short, medium, and long term by balancing risk and reward across assets like stocks, bonds, gold, etc. 

Diversification simply allows you to mitigate risk within a portfolio by investing within and across multiple asset classes. Either way, it’s important to know how portfolio allocation works. You can consult a Cube Wealth Coach or download the Cube Wealth App.

This blog will walk you through portfolio allocation and how it can allow you to view your investments as a part of a holistic basket of securities that can be rebalanced based on age, risk appetite, and more.  

What Is Portfolio Allocation?

Portfolio asset allocation involves dividing your budget and assigning your capital to various categories of investments like equities, bonds, and cash and cash equivalents. Asset allocation can be based on:

• Investment goals 
• Risk profile
• Age
• Liabilities 
• Responsibilities
  

For example, investors in their 20s may go for an aggressive stocks to bonds split, while investors in their 30s might adopt a more conservative stocks to bonds split. 

Types Of Portfolio Allocation

1. Aggressive Portfolio Allocation

An aggressive portfolio mainly contains high risk, high reward investments like small-cap funds & shares with minimal exposure to low-risk investments like bonds.

Aggressive investments are known to be volatile in the short term. At the same time, aggressive investments have the potential to generate high returns over the long term (5+ years).   

Here’s a snapshot of a potentially aggressive portfolio:

2. Moderate Portfolio Allocation

A moderate portfolio would contain the best of both aggressive and conservative investments. For example, a 50/50 split between stocks and bonds.

Or, a 1/4th split across assets like stocks, bonds, gold, and alternative investments. Here’s a snapshot of a potentially moderate portfolio:

3. Conservative Portfolio Allocation

A conservative portfolio looks to value safety, low risk, and conserving capital over generating high returns. For example, it could be a 30/70 split between stocks and bonds. Here’s a snapshot of a potentially conservative portfolio: 

Factors That Affect Portfolio Allocation

1. Income

The money you earn plays a big role in asset allocation as your income is directly correlated to your investing power. The impact of income on asset allocation can be explained by a classic example. You can consult a Cube Wealth Coach or download the Cube Wealth App.

Salaried professionals who can expect to earn a regular paycheck will have more certainty about their asset allocation compared to a businessman whose investing power hinges on his monthly profit/loss. 

2. Age

With age, comes responsibilities that can directly affect your portfolio asset allocation. Investors in their 20s may have fewer liabilities than an investor in their 30s. This implies two things when it comes to age:

• Risk-taking capacity may diminish over time
• Ability to deal with financial loss may reduce over time
  

Thus, age can determine whether you follow an aggressive, moderate, or conservative asset allocation approach. It can also lead to a gradual re-balancing act as time passes. 

3. Financial Goals

Your financial goals can determine what type of portfolio asset allocation strategies you should follow. For example, you’re in your 30s and your goal is to retire by 50. 

You’d want to invest aggressively to generate high gains in order to ensure that the goal is met. Your portfolio asset allocation would be a representation of this goal. 

Moreover, investors can rebalance their portfolio allocation based on how close or far they are to achieving their financial goals. Other scenarios for revisiting asset allocation include:

• Holding on to bad investments
• New investment opportunities
• Emerging trends or market cues
  

Worried about the health of your portfolio? Get A Free Portfolio Analysis Now

How To Achieve Optimal Portfolio Asset Allocation?

Truth be told, there’s no one-size-fits-all approach when it comes to portfolio allocation. It’s about doing what’s best for your financial goals by investing in the right investment options. You can consult a Cube Wealth Coach or download the Cube Wealth App.

This can be super difficult if you have little to no experience with asset allocation. That’s where an app like Cube Wealth can help you. Cube’s perfect portfolio builder works across two levels to make life easier. 

Level 1: Understanding Risk Profile & Investment Goals 

Cube’s risk analysis quiz can help you determine your risk profile and narrow in on your investment goals. Knowing both is extremely useful to understand the right asset allocation strategy.

Level 2: Perfect Portfolio Asset Allocation

Cube follows the 9-box model to help you achieve optimal asset allocation or build the perfect portfolio based on information from Level 1 for these timeframes:

• Short-term (0-3 years)
• Medium-term (3-5 years)
• Long-term (5+ years)
  

Recommended assets include options from categories like:

• Liquid funds
• Debt funds
• Conservative funds
• Moderate funds
• Aggressive funds
• International funds
• ELSS funds
• US stocks
• Digital Gold
• Alternative assets
  

But wait, there’s more. While Cube helps you figure out asset allocation with the perfect portfolio builder, the investment options themselves are recommended by industry experts like Wealth First and RIA Rick Holbrook. 

Download Cube Now to know more about building the perfect portfolio of assets.

Watch this video to know more about building the perfect portfolio

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FAQs 

1. Why is portfolio allocation important?

Ans. Portfolio allocation is crucial because it allows investors to manage risk, optimize returns, and align their investments with their financial goals. A well-structured portfolio allocation can lead to better diversification and long-term wealth accumulation.

2. What factors should I consider when determining my portfolio allocation?

Ans. Several factors influence portfolio allocation, including an individual's risk tolerance, investment objectives, time horizon, financial situation, and current market conditions. Age and life stage are also significant determinants of the ideal allocation.

3. How can I determine the right portfolio allocation for me?

Ans. To determine the optimal portfolio allocation, you should assess your risk tolerance and ensure it aligns with your financial objectives. Consulting with a financial advisor or using online tools and calculators can assist in creating a suitable allocation strategy.

4. Can portfolio allocation change over time?

Ans. Yes, portfolio allocation should evolve over time to adapt to shifts in financial goals, risk tolerance, and market conditions. Rebalancing the portfolio is a common practice to maintain the desired asset allocation.

Conclusion

Portfolio allocation, often referred to as asset allocation, is a cornerstone of investment strategy. It plays a pivotal role in achieving financial success, managing risk, and optimizing returns. This practice involves the deliberate distribution of investments across various asset classes to create a balanced and diversified portfolio.

The importance of portfolio allocation lies in its ability to strike a balance between risk and return, allowing investors to pursue their financial goals with a structured approach. By diversifying holdings across different asset classes, individuals can better manage risk and enhance their prospects for long-term wealth creation.

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