Account asset allocation
For each asset class, you need to set a target allocation for the account.
The act of determining an ideal asset allocation is part art and part science, and it consists of a financial advisor's most important work. Your ideal allocation should depend on:
1. Your risk tolerance, as some asset classes are riskier than others.
Your risk tolerance depends not only on your willingness to take risks but also your ability to do so. You may be risk-averse as a person, but you may also be young, have high income, and have no dependents--three characteristics indicating a high ability to take risks. Conversely, you may be a natural risk taker, but if you are approaching a time during which yourself or your dependents absolutely need money, your risks should be more limited.
The timing of when you will need the money invested is an important factor.
Generally, you can invest in stocks money you will not need for 10 or more years. The rest should be in fixed income investments.
2. Your desired return; the risky asset classes may reward you with higher returns if you take a higher risk.
To reduce the risk in you stock portfolio, you can diversify your investments. Holding international stocks is now easy though ETFs and Mutual Funds.
Generally, you will want to maximize the return for the maximum amount of risk that you are able and willing to take. At the bottom of page is a graph displaying your perceived average risk and expected returns (as calculated based on your inputs on the investment entry pages).
Once your target allocations are set and add up to 100, the table also displays, in black, how much each asset class needs to be bought in order to rebalance the account and, in red, how much needs to sold.
Your risk tolerance can change over time, as the investment horizon will probably shorten. There will be less and less time, for example, for your investments to recover from market downturns or crashes. Therefore, you should reduce your risk exposure as you approach the time at which you will absolutely need your money. However, the investment time horizon could also lengthen if you have enough money, after a certain age, for the remainder of your lifespan. In that case, you could invest for a long-term legacy. This page will allow you to enter new values for your future asset allocations; simply select the year that you wish to edit. Set target allocations persist until January 1st of the year after they are changed.
The TIME MACHINE will automatically rebalance the portfolio to the applicable target allocation every year.
If you wish to assign an allocation to an asset class not currently on the list, you can do so by adding one or more investments of that asset class (or containing that asset class) to the account. They may have a value of zero.
The 'Get rebalancing recommendation' button will lead you to a page recommending which, and how much, of your investments you should buy or sell to rebalance your portfolio to your current target allocation (subscription required).
The 'Optimize portfolio' button will use Modern Portfolio Theory to analyse your portfolio using historical market data. You will then be able to optimize and rebalance the portfolio to maximize expected return and minimize expected volatility (subscription required.
The pie charts below the table display the current and target allocations, and they also subdivide them by asset location and asset type.