Ultimate Retirement Guide 5 – Asset Allocation

It’s about time again for another post in my Ultimate Retirement Guide Series. As a refresher, the goal of this series will be to provide an in-depth answer to this question: “what do I need to do to retire?” As well as any questions that could stem from that initial question. The goal is to have this cover all of the information I’ve looked at since I started really becoming interested in retirement saving, both early or traditional. I hope to mostly focus on items that have been relevant to me in my own experience and where I am in my journey at the time of writing. Throughout, I will try to present as unbiased a position as possible, but I’m sure that I will not be perfect.

So far, we’ve laid out the following five large steps needed to retire:

  1. Determine when to retire.
  2. Determine the amount needed to retire.
  3. Save that amount.
  4. Prepare to transition from working to retirement.
  5. Retire.

Currently we’ve been working through step 2 by breaking it into the following subsections.

  • The 4% rule of thumb
  • Other withdrawal rates
  • Other withdrawal strategies
  • Length of retirement (and sequence of return risk)
  • Inflation
  • Asset Allocation
  • Different types of investment strategies (rentals, stocks, ect.)
  • Other expenses
  • Visualizing retirement

Last time we discussed inflation and how it can derail your savings both on the way to retirement and once you actually retire. This week I thought we’d talk about asset allocation.


As with most things on this site, I am not a financial advisor nor another form of expert. Everything below should be taken as opinion. Always consult with your financial advisor before making changes.

What is asset allocation?

An asset allocation simply describes how you’re allocating the money in your portfolio. In some ways you have several asset allocation depending on the level of detail you want to include. It’s just how you categorize what you own.

To put an example to it, my asset allocation is currently 90% stocks 10% other (in this case other is a mix of bonds and real estate), cash makes up a small residual but my retirement portfolio contains no cash. You could also take that to another level and then it is 60% US stocks, 30% International stocks, approximately 5% bonds, and approximately 5% real estate.

If you wanted to, you could take that even another level, I.E. 1% of my portfolio is stock XYZ or 50% of my portfolio is big tech. Individual industries could be the allocation too, say 10% oil. The sky is kind of thr limit.

What’s the point?

To discuss a portfolio you need a way to talk about what you own. Depending on the discussion, you may want to use different levels of detail. For instance, I could describe my portfolio as a 90/10 portfolio. This way people understand I aim for 90% stocks and around 10% bonds and/or other investments. While that may not describe my asset allocation on any particular day.

It also helps with rebalancing your account. If you don’t know what asset allocation you aim for, when your yearly rebalance comes due, there’s no way to know what to sell or what to buy as you move the money about.

Finally, you also need to use it for your simulations and to temper your expected returns. If you have a 60/40 portfolio, like what we’ll discuss below, your expected returns should be less than those you’d expect with a 70/30. However there may be reasons you choose a 60/40 over a 70/30. If you don’t know what you own you don’t know what to expect as far as returns are considered.

Different kinds of asset allocations

With that out of the way, let’s look at a few different asset allocations that I’ve seen in the past.

The most obvious one is the 100% portfolio. This is having all of the cash in a portfolio in a single asset category. Be this a specific stock, just stocks, real estate, crypto, ect. Most often I see it as just 100% stocks or 100% real estate. While this has a higher chance for higher returns than other strategies, depending on what the portfolio specifically buys, it also can have higher volatility.

The most common one I usually see discussed is the 60/40 portfolio. This is simply a portfolio that is 60% stocks (usually via some index fund) and 40% bonds. This portfolio was developed in the 1950s to try and maximize expected returns while minimizing volatility. Over time I plan to slowly shift my portfolio to something similar to this allocation. But we’ll talk about that later.

Another common one is the 70/30 portfolio. This is just the 60/40 portfolio with a little bit higher expected returns at the cost of higher expected volatility.

Age based is another strategy for asset allocation. to paraphrase from Investopedia: For this one you take your age and subtract it from some number, I’ve seen anywhere from 100-120, that portion of your portfolio is to be stocks. For instance if I were to apply this strategy it would be 100 – 24 = 76. So 76% of my portfolio would be stocks with the remainder being bonds.

There are plenty of other asset allocations that can be chosen from as well. But they’re not commonly seen.

Changing your Asset Allocation

Luckily, asset allocations aren’t set in stone once you choose one. If you get a few years down the line and find it isn’t working for you, or your situation changes, it may make sense to change it.

Before I continue though, I think it is important to note that you shouldn’t just change asset allocation on a whim. You should take time to think about it. Investing is a game played over years, if not decades, not months. If you want to change since you don’t like the results over a short period you should reflect on if that is because of the allocation or because of some other reason (overall down market) and if a different allocation would actually serve you.

But with that out of the way here are a few reasons you may want to change your allocation.

High volatility can be a great reason to change your asset allocation. If you’re being kept up at night due to the volatility of your portfolio it makes sense to update your allocation. This is one of the reasons I don’t currently have a 100% stock portfolio.

Age and retirement are two other reasons that you may wish to adjust your portfolio allocation. As you near retirement (or retire) you may want a less volatile portfolio. The 100% portfolio may work great for saving for retirement but once it comes time to draw down those funds, the higher volatility can cause the success chance in retirement to decrease.

Changing goals can also affect what may be the best asset allocation for you. If your goal is to retire at 30 and you’re 25 when you decide to shoot for this goal, and you’ve been saving to retire at a more traditional age like 65, you may need to have a more aggressive asset allocation to have a better chance of reaching your goal.

Disappointing expected returns may also be a reason to change your asset allocation. This is different from poor performance and I want to stress that. This is not changing your asset allocation after one bad year, or two bad years. If after doing more research you come to the conclusion that the expected returns from your portfolio are not what you thought they were, or should be, that may be a reason to update your asset allocation to one that is more in line with the returns you need to see and volatility you can stomach. The same reasons can be used in terms of volatility of the portfolio as well.

Now for the most dangerous reason, poor performance. If over a large period of time, say 10+ years, your asset allocation just isn’t working. It may be a reason to update it to something more in line with your goals. Once again though, this is over long periods of time not a short one. If for 10 years straight your junk bond portfolio is just not working than maybe it’s time to reevaluate the portfolio and asset allocation.

Making your own Asset Allocation

Now it comes time for the big question. How do you arrive at your asset allocation(s). I think about it from the following method.

First you should consider what you want your portfolio to consist of. Is it just going to be stocks and bonds? Is there a place for international stocks? Are you going to have rentals in there? What about crypto? Once you have these answers it comes time to do some research.

Once you have the items that will make up your portfolio you need to do some research into expected returns and volatility. Here you’ll look at the long term average return of each category (I.E. stocks tend to return about 10% a year), volatility (stocks tend to have about 15% from the long term average), and correlation between other assets in your portfolio. On that last point REITs, a type of stock for real estate, are highly correlated to stocks but residential real estate like rentals are less correlated.

I usually then lump together highly correlated assets unless they’re a common asset class. I.E. I lump international and regular stocks together but not real estate despite the high correlation. The goal is to say I want these items in my portfolio and I expect x% in returns every year from them if I have a 100% portfolio consisting of each (or from whatever blend of them I’m using).

Then you can simulate a few different portfolios to see what your expected returns and volatility are. This will allow you to hone in your portfolio to something you think you would be comfortable with both return and volatility wise. There’s a few ways you could do that like lumping US and international stocks together or breaking them out and looking at each class individually. These should use historical data as best as possible, there are plenty of calculators out there that will do this for you. I suggest starting with a higher stock/real estate portfolio and less to bonds. If you’re going with a more traditional portfolio (no crypto), you can try a few common ones to start such as a 60/40.

You should also consider your time horizon when creating this portfolio. If you’re not touching the money for 60 years it makes more sense to have the highest returns and volatility you can handle while planning to adjust over time, be that using the age based method (say 120 minus your age) or at some number of years out adjusting (say 10 years before retiring you adjust to your retirement allocation).

Once you’ve honed your asset allocation you give it a try in the real world and rebalance on your regular schedule. Say you rebalance yearly, you bring it all back to this portfolio and see how living with it goes. Just because on paper you were fine with higher volatility in the real world that may not be the case. I suggest trying a portfolio at least through one down or volatile market, such as we had in 2022.

If you decide it doesn’t work for you, say too volatile, go back to the above and tweak the numbers a bit.

I also would suggest not getting too into the weeds on this. I adjust by somewhere around 10% when I do this, although in some cases I’ll use 5% but I try to make those exceptions not the rule. I like nice round numbers and with these I can get close enough. You don’t get much of a benefit by a 1% change in portfolio and that level of minutia will just make it tedious.

I’d also warn you to be careful to avoid concentration risk. For those that aren’t familiar, concentration risk is the risk that holding one position (usually an individual stock) can cause a portfolio to underperform due to something happening to this one position. Bitcoin or Amazon may be doing well now but that may not be the case forever. Usually I see a suggestion of not letting an individual position get above 10-20% depending on the specific person writing.

This is less of a risk with indexes and other aggregates because while I may have 60% of my portfolio in US stocks no one US stock makes up more than 7% of the index I buy.

What about mine?

So here’s how I arrived at my asset allocation.

I took a look at the different asset classes and decided I wanted stocks and bonds. Stocks were to contain some international exposure as well. So my categories were US stocks, International Stocks, and Bonds. I considered real estate and crypto but I discarded those. Due to my 401k, real estate would make a return later though. I don’t consider the cash on hand as part of my portfolio as it is either spoken for or for emergencies.

I then started with a traditional 40/20/40 portfolio. That is, 40% US stocks, 20% International stocks, and 40% bonds. As I wanted more returns on the way to retirement and could, I think, handle the higher volatility. I adjusted upwards until I was at a 60/30/10 portfolio. In my 401k, I use real estate for that 10% instead of bonds since I did not like the bond funds available.

I rebalance yearly at or near my birthday and so far this portfolio has been working for me.

I will note that as I get closer to retirement I’m shifting my allocation towards bonds. I do this by shifting about 5% of my portfolio to bonds every year. This will give me my desired composition at retirement.

I also have some cats and dogs hanging around from before I made my portfolio. These I don’t count in my asset allocation. I’ll be selling these immediately after retirement when the tax burden will be minimized.

So far, this allocation and plan has been working for me. We’ll see as I get wealthier if I can handle the same kind of drops that I can now.

Wrapping it up

That’s about it for asset allocations. To summarize, asset allocations describe how you’re allocating your funds into a portfolio. You can use these to research what your expected returns are, rebalance your portfolio, and plan for the future. Without one, you’re kind of flying blind without any idea of what really is in your portfolio and what you should expect out of its performance.

When arriving at an asset allocation it’s important to consider other factors such as time until retirement and your own personal risk tolerance. The biggest thing I want to hammer home though is that poor performance over a short term is not the reason to change your asset allocation. It’s also important to avoid concentration risk, especially if you’re using individual stocks, or other assets, as your asset allocation.

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