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WalletPrep worksheet · Investing

What is asset allocation, and how do you pick yours?

Name ____________________ Date __________

Key ideas

  1. Time horizon sets how much risk fits. Money needed within about 5 years stays in savings or bonds. Money for 20 or more years out can hold mostly stocks.
  2. Test your mix with a 30% drop. Nia's $12,000 in stocks would show a $3,600 paper loss. If that would make you sell, hold fewer stocks.
  3. Each goal can have its own mix. A down payment fund and a retirement account have different deadlines, so they need different splits.

Vocabulary

Asset allocation
How you divide your investments among types like stocks, bonds and cash, based on your goals, timeline and comfort with risk.
Stock
A small piece of ownership in a company. Its price rises and falls with how investors value the business.
Bond
A loan you make to a government or company. It pays you interest and returns your money on a set date, called the maturity date.
Time horizon
How long you plan to keep money invested before you need to spend it.
Risk tolerance
How much loss you can accept, in money and in nerves, in exchange for the chance of higher returns.
Inflation
The rise in prices over time, which means each dollar buys a little less each year.

Work it out

Nia, 29, has $15,000 for retirement across her 401(k) and IRA. She has an emergency fund and 35 years to go. She picks 80% stocks and 20% bonds, with 30% of her stocks international.

  1. Total invested
  2. Bonds (20%)
  3. Stocks (80%)
  4. International (30% of stocks)
  5. US stocks
  6. Paper loss if stocks fall 30%

Check yourself

  1. You have $20,000 and want a 70% stocks, 30% bonds mix. How much goes into bonds?

    • A. $3,000
    • B. $6,000
    • C. $14,000
    • D. $7,000

  2. Which goal fits a mostly stock allocation best?

    • A. Retirement in 30 years
    • B. A wedding in 18 months
    • C. An emergency fund

  3. What two things mainly set your asset allocation?

    • A. Your income and your age only
    • B. Last year's best fund and the news
    • C. Your credit score and your rent
    • D. Your time horizon and your risk tolerance

Your turn

Add up what you have in stocks, bonds and cash across all your retirement accounts and divide each by the total. Compare those percentages with the mix you want, and write your target down.

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Answer key

What is asset allocation, and how do you pick yours?

Work it out

  1. Total invested$15,000
  2. Bonds (20%)− $3,000
  3. Stocks (80%)= $12,000
  4. International (30% of stocks)− $3,600
  5. US stocks= $8,400
  6. Paper loss if stocks fall 30%$3,600
  1. $15,000 × 20% = $3,000 goes to a bond index fund, leaving $15,000 − $3,000 = $12,000 for stocks.
  2. Of the stocks, $12,000 × 30% = $3,600 goes international and $12,000 − $3,600 = $8,400 to a US stock index fund.
  3. Stress test: a 30% stock drop means $12,000 × 30% = $3,600 lost on paper. Nia decides she could hold through that, so 80/20 stays.

Check yourself

  1. B. $6,000 $20,000 × 30% = $6,000 in bonds, and $20,000 × 70% = $14,000 in stocks.
  2. A. Retirement in 30 years A long time horizon gives you years to recover from drops. Short-term goals and emergency money belong in savings.
  3. D. Your time horizon and your risk tolerance When you need the money and how much loss you can handle set the mix. Age matters mostly because it shapes your time horizon.