top of page

What Is Asset Allocation - What You Need To Know - DM 85



What is asset allocation? That's a great question. It's Jon from Financial MD, welcome to today's Didactic Minute.

 

Now this week we're focusing on investments and specifically this concept called asset allocation. There are other terms for this, but in general, it's just where your money is invested; what percent is here versus here. There are a lot of different things you can do in an investment account. So when I say investment account, I'm talking IRA, Roth IRA, brokerage account, 401(k). Any of those things are accounts where you deposit money and then you get to pick how it's invested inside, whether you do it yourself or you have an adviser do it or a robo-advisor through something like Betterment or Wealthfront. That is what asset allocation is. It's putting money in an account and then deciding how it's invested.

 

Now here's a thing we often have to educate. You don't have to pick just one investment. You can pick several. You can pick hundreds. Frankly, I don't think there are any limits really. I've never tried. But most of our accounts for our clients here have several to a dozen different, not just stocks, but mutual funds. Search for our videos on mutual funds or ETFs to see what that means. But you can put several types of investments, several different investments, inside one account. And what percent goes to those is your asset allocation – what percent is in this investment and this one and this one and this one all inside the same account. And that asset allocation question is answered by a few things: What's your risk tolerance? How risky do you want it? Do you want it aggressively invested so it can grow a lot but it's going to be volatile? Or do you want it conservative? It might not grow much but it's going to be pretty stable. Or do you want it a mix of the two? So that's one question.

 

Time horizon – how soon do you need to get to the money. If you're a young doctor I'm talking to right now and it's in an IRA or 401(k), you're not going to use that money for a long time so you may want to be more aggressive. If it's an account where you're saving up for a down payment on a house or a kid's college or buying a business or any of those kinds of things, then maybe you want it a little more conservative because when you want to get to that money in a few years, you don't want it to be in a down market and it's all stocks and…you know what I mean.

 

So that's really what the concept of asset allocation is. When you hear that word, it means what's inside my account and what percentage is in each type of investment. Again, you're typically unlimited on to what kinds and types and different investments you can do.

 

Why wouldn't you pick just one? That's probably the question you're thinking now. Well, there's a concept called diversification, which we can get into later. But to just generally touch on it quickly, diversification is spreading out your risk. So if you've got $1,000 in your Roth IRA, instead of having it all in Apple which technically could go bankrupt tomorrow, you have it in about a hundred different tech stocks or a hundred different companies. That's called a mutual fund, or an exchange-traded fund or an ETF. So that's how you can have exposure to the tech sector or you can have exposure to the stock market but not have all your eggs in one basket, so to speak.

 

So, that's asset allocation. It's a good idea to think through it - why do you have your investments the way they are and what percent.

 

If you've got questions, we're happy to chat about it. Let us know. You can comment below. You can direct message us or check out financialmd.com.

 

Again, it's Jon from Financial MD, we'll see you guys next time.

 



6 views0 comments

Comments


bottom of page