Asset Allocation

Asset allocation is the most important decision in your portfolio. Learn how to distribute equities and bonds by profile. Index Balance manages it automatically.

Definition

Asset allocation is the decision of how to distribute a portfolio's capital across different asset classes: equities, bonds, real estate, cash and others. It is the most important investment decision an investor makes, because it determines — more than the selection of individual securities — both the level of risk and the expected long-term return.

For the index fund investor, asset allocation typically boils down to the equity/bond ratio. A 100% equity portfolio is more volatile but historically more rewarding over the long term; a 60/40 mix reduces fluctuations at the cost of some return. The right choice depends on each investor's time horizon, risk tolerance and liquidity needs.

Index Balance lets you see your portfolio's actual asset distribution at all times and compare it against your target. The tool detects when your allocation has drifted and tells you how much to rebalance. Try it free at indexbalance.com.

Practical example

You set a target allocation of 80% equities and 20% bonds. After a year of rising markets, your portfolio has shifted to 87% equities and only 13% bonds. To return to target, you need to sell some equities or direct future contributions to bonds until the balance is restored. Index Balance calculates this automatically every time you update your portfolio.