Asset Allocation Calculator

Asset allocation—a portfolio's strategic mix of stocks, bonds and cash—is one of the most effective ways to shape your investment strategy. 

That’s why SmartAsset built a tool to help you identify an asset allocation aligned with what type of investor you are. Choose from five investor profiles, ranging from very conservative to very aggressive. Then review the suggested mix of stocks, bonds and cash. 

A financial advisor can help you manage your investment portfolio. To find a financial advisor who serves your area, try SmartAsset's free online matching tool.

Our free calculator also shows you how your money can potentially grow when invested according to one of the models. For example, $10,000 invested in an aggressive asset allocation (80% stock, 15% bonds and 5% cash) could grow to anywhere between $81,000 and $201,000 over a 30-year period. 

What Determines Your Investor Profile?

Your investment goals, time horizon, age, capacity and willingness to accept risk all help define your investor profile, and in turn, your asset allocation. These factors don’t exist in a vacuum—they influence one another and come together to shape the mix of investments that’s likely to fit you best.

Investment Goals

There are myriad reasons to invest your money. Saving for retirement, buying a home or paying for a child’s college education are just three common goals that you may pursue through investing. As a result, your goals often play an important role in shaping your investor profile.

For example, someone saving for their newborn child’s college fund may invest primarily for capital appreciation and follow an aggressive asset allocation. A retiree who’s focused on generating income and preserving capital may adopt a conservative portfolio framework. 

Time Horizon

Time horizon refers to how long you have until you need the money in your portfolio. Time horizon and age are often directly tied to specific goals. 

For example, if you’re hoping to purchase a house in the next one to two years, you’ll likely take a much more conservative approach to investing to protect your investment. This might mean shifting more money into bonds and cash, rather than stocks. On the flipside, saving for a retirement that’s still decades away means you’ll likely be much more aggressive investing because you have much more time to recover from potential losses. 

Risk Profile

Your tolerance and capacity for risk are also primary components of your overall investor profile. They may sound alike, but each plays a different role in shaping your asset allocation. 

Risk tolerance refers to your emotional or psychological willingness to accept risk. An investor with a high risk tolerance is comfortable investing in risky stocks that can produce significant returns but potentially lead to large losses. An investor with a low risk tolerance prefers the predictability and safety of blue chip stocks and fixed-income assets, even if it means forfeiting potential upside. 

Risk capacity, on the other hand, is a more objective metric that measures your ability to take on risk. Risk capacity is based on your financial situation, time horizon, financial goals and current holdings. While you likely have a sense of your risk tolerance, a financial advisor can help define your risk capacity, and in turn, your asset allocation. 

Understanding Asset Classes

Before you decide how to split your money, it helps to know what you’re actually investing in. Each asset class behaves differently and plays a specific role in your portfolio.

Stocks

Investing in stocks, or equities, means buying ownership shares in companies. Companies issue stock as a way of raising money and spreading risk. You can make money in equities by selling your shares for a profit, investing in stocks that pay dividends or a combination of the two. 

Keep in mind that you don't have to invest in individual companies to add stocks to your portfolio. Mutual funds, index funds and exchange-traded funds (ETFs) pool money from investors and buy a diversified basket of stocks and other assets. 

Our Asset Allocation Calculator not only provides a target mix of stocks, bonds and cash, but offers a breakdown of the types of stocks that you may consider for your portfolio. Stocks can be classified in a variety of ways:

• Large cap: Large-cap companies have market capitalizations of at least $10 billion, meaning the value of all outstanding shares equals $10 billion or more. Large-cap companies are typically well-established and stable. 
• Mid-cap: Mid-cap companies have market capitalizations between $2 billion and $10 billion. These firms are generally still growing, but more established than small caps.  
• Small cap: Small-cap companies have market capitalizations between $250 and $2 billion. These enterprises are typically focused on growth, offering higher potential returns for investors, as well as higher risk.  
• International: International stocks represent ownership stakes in companies located outside the United States, which can help you diversify your portfolio. 
• Emerging markets: Emerging markets comprise companies in countries that are still developing but growing fast. These economies can be unpredictable, but like small-cap stocks, offer strong returns. 

Bonds 

Bonds can act as a counter-weight to the stocks in your portfolio. They can be a slow-and-steady refuge when stocks aren't performing well. Bonds can provide stability and predictable income, but they lag behind stocks over time. 

When you buy stocks you become a partial owner. With bonds, by contrast, you're a lender. Companies and governments issue bonds to raise money for their operations. 

Most investors consider U.S. Treasury bonds a rock-solid investment because there's virtually no risk that you'll stop receiving interest or that you could lose your principal. Corporate bonds, on the other hand, are riskier but can pay higher interest rates. State and local governments issue municipal bonds, which pay interest that isn’t taxed at the federal level. Municipal bond interest may also avoid state and local taxes. 

Your principal is the amount you pay for a bond, while a coupon rate represents the percentage of your principal that you'll receive as an interest payment. You keep earning interest until the bond's maturity date. 

Cash

Cash gives you flexibility and acts as a buffer against equity risk within your portfolio. Keeping money in cash could mean putting it in a high-yield savings account, short-term bonds, certificates of deposit or money market funds. 

But if you keep all your money in cash you probably won't beat inflation. In that case, your portfolio might lose value or grow too slowly to reach your goals. On the other hand, if your asset allocation has no cash component, your portfolio becomes more susceptible to market volatility. However, if your time horizon is long, this may be a worthwhile tradeoff. 

Alternative Investments 

While our calculator recommends target percentages of stocks, bonds and cash, your portfolio could feature other asset classes. Alternative investments like real estate, hedge funds, private equity and commodities can provide additional diversification and boost your returns.

However, alternative investments aren’t for everyone. For example, only accredited investors typically have access to hedge funds and private equity. Other alternatives like real estate or art are considered illiquid because you can’t easily convert them to cash, making them less accessible for certain investors.

Rebalancing Your Portfolio

Our Asset Allocation Calculator can offer a suggested starting point for how to split your money between stocks, bonds and cash. But over time, your portfolio’s composition may change and stray beyond these target percentages. This may require you to rebalance your portfolio. 

For example, suppose you initially had a moderate asset allocation with 65% of your money invested in stocks, 35% in bonds and 5% in cash. But over the course of the year, your stocks performed better than expected and now comprise 75% of your portfolio’s value. To bring your portfolio back to within your original target allocation, you sell 10% of your stocks and reinvest the proceeds into your bonds and/or cash. 

Of course, you could keep your portfolio as is, but having three quarters of your assets invested in equities may expose you to more risk than you’re willing to assume. 

Asset Allocation By Age 

While some investors use rebalancing to adjust their asset allocations over time, others let their age dictate how to spread their money across asset classes. This is quite common for retirement portfolios and target date funds. 

A well-known rule of thumb called the “Rule of 110” suggests subtracting your age from 110 to determine how much of your portfolio to invest in stocks. The remaining assets can be invested in bonds, cash and cash equivalents. For example, a 25-year-old would allocate 85% of her money to stocks and 15% to lower-risk assets. 

You can tweak this rule slightly if you’re comfortable taking on more risk in exchange for potentially higher returns. Instead of subtracting your age from 110, you’ll use 120 as your starting point. For example, the same 25-year-old would have a 95/5 allocation between stocks and bonds/cash, instead of the 85/15 split from above. 

Asset Allocation Tips

• The asset allocation approach discussed above is what’s known as strategic asset allocation. Some investors use tactical asset allocation, adjusting their portfolio in response to short-term market trends. While this management strategy can deliver higher returns, especially during times of volatility, it requires more expertise, research and time.  
• If you need additional help selecting investments and managing your portfolio, consider working with a financial advisor. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.