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.
What is the 5 asset rule? ›
You may end up losing your wealth or even your capital. To avoid such a risk, follow this mantra, of devote no more than 5 per cent of their portfolio to any one investment asset. This concept is also known as the "investment allocation rule."
Is it better to have multiple investment accounts? ›
If you're considering whether it's worthwhile to open a second, third or 10th brokerage account, here are some points to keep in mind: Multiple brokerages help diversify and manage risk. Work toward financial goals with a holistic approach.
What is a good asset allocation mix? ›
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 is the golden rule of asset allocation? ›
This principle recommends investing the result of subtracting your age from 100 in equities, with the remaining portion allocated to debt instruments. For example, a 35-year-old would allocate 65 per cent to equities and 35 per cent to debt based on this rule.
What is the 12 20 80 asset allocation rule? ›
Set aside 12 months of your expenses in liquid fund to take care of emergencies. Invest 20% of your investable surplus into gold, that generally has an inverse correlation with equity. Allocate the balance 80% of your investable surplus in a diversified equity portfolio.
Is it safe to keep more than $500,000 in a brokerage account? ›
SIPC coverage insures people for up to a limit of $500,000 in cash and securities per account. SIPC protections also include up to $250,000 in cash coverage. The total amount of SIPC coverage is $500,000; thus, if you have $500,000 in securities and $250,000 in cash, that entire amount may not be covered.
How many investments is too many? ›
There's no absolute cutoff point that distinguishes an adequately diversified portfolio from an over-diversified one. As a general rule of thumb, most investors would peg a sufficiently diversified portfolio as one that holds 20 to 30 investments across various stock market sectors.
Is it illegal to have multiple investment accounts? ›
It may be that you own shares of a given company in one brokerage account, and you've forgotten that. But you may not want to add those shares when it's a company you're already invested in. All told, you absolutely can have more than one brokerage account, and it could even be a good idea.
What is the most successful asset allocation? ›
Your ideal asset allocation is the mix of investments, from most aggressive to safest, that will earn the total return over time that you need. The mix includes stocks, bonds, and cash or money market securities. The percentage of your portfolio you devote to each depends on your time frame and your tolerance for risk.
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.
How should you split your investment portfolio? ›
First, set aside enough money in cash and income investments to handle emergencies and near-term goals. Next, use the following rule of thumb: Subtract your age from 100 and put the resulting percentage in stocks; the rest in bonds. In other words, if you're 20 years old, put 80% of your assets in stocks; 20% in bonds.
How many mutual funds should you have in your portfolio? ›
However, analysts say that at any point of time, three to five mutual funds . A few multi-caps, combined with one large-cap and a mid-cap, should do the trick. If your appetite is a high-risk one, then you may pick a fund of small-caps. Additionally, you should make sure that funds you pick don't hold the same stocks.
What 3 things determine your asset allocation? ›
Choosing the allocation that's right for you
- Your goals—both short- and long-term.
- The number of years you have to invest.
- Your tolerance for risk.
Commonly cited rules of thumb suggest subtracting your age from 100 or 110 to determine what portion of your portfolio should be dedicated to stock investments. For example, if you're 30, these rules suggest 70% to 80% of your portfolio allocated to stocks, leaving 20% to 30% of your portfolio for bond investments.
What is the 5 in house asset rule? ›
At the end of a financial year, if the level of in-house assets of a SMSF exceeds 5% of its total assets, trustees must prepare a written plan to reduce the market ratio to 5% or below. This plan must be prepared before the end of the next year of income.
What are 5 assets? ›
Examples of Assets
- Cash and cash equivalents.
- Accounts receivable (AR)
- Marketable securities.
- Trademarks.
- Patents.
- Product designs.
- Distribution rights.
- Buildings.
In general, by age 50, Fidelity says that you want to have about six times your annual income in retirement savings. So, for example, with a national median personal income around $40,500, you would want about $243,000 in your retirement account by age 50.
What are Class 5 assets? ›
Class V: All assets not in classes I – IV, VI, and VII (equipment, land, building) Class VI: Section 197 intangibles, except goodwill and going concern. Class VII: Goodwill and going concern.
