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Asset Allocation: The Perfect Recipe

Zoe Team

Jun 26, 2018

5 min read

A financial advisor reviewing a plan with two clients at a table

Key Takeaways

Understand how to create a balanced mix of asset classes for your specific risk profile.
Learn why periodic rebalancing is essential to maintaining your target investment strategy.
See how asset allocation acts as the foundation for a resilient and effective long-term financial plan.

Frequently Asked Questions

What is asset allocation?

It is the strategic process of dividing your investment portfolio among different asset classes like stocks, bonds, and cash.

Why is rebalancing important?

Rebalancing keeps your portfolio aligned with your original risk tolerance and goals as market values shift over time.

How often should I adjust my asset mix?

You should review your allocation regularly, especially when major life changes occur or your financial goals evolve.

Asset Allocation:

The Perfect Recipe

In this article: Asset allocation is a crucial part of a financial plan. Learn more about how to create your perfect mix of asset classes and rebalancing existing plans.

The late Anthony Bourdain, world famous celebrity chef, reported that the worst thing he had ever eaten was a McDonald’s chicken nugget. That’s a pretty bold statement considering he was known for consuming exotic dishes like ant eggs and raw seal eyeballs. As we know, food preferences vary greatly across the globe… as should asset allocations.

What Is For Dinner?

Even if you are no culinary genius, you know that ingredients are key to creating the perfect meal. Having said that, when I throw together tomatoes, garlic, onion, and pasta, it doesn’t quite taste as good as the restaurant down the road’s Penne Napoletana. I might attribute this to different ingredients, varied proportions, or even my method of cooking.

We certainly don’t profess to be culinary masters here at Zoe, but we are experts in personal finance and investments. Our analogy of cooking a meal goes a long way to explain the concept of asset allocation & asset management.

Ingredients

When you decide what to cook for dinner, there is a plethora of information that you need to know before you can get started. For instance, how many people will you be feeding, how many courses will you be making, does anyone have allergies… the list goes on.

In a similar vein, when you are deciding on the asset allocation of your investment portfolio, you need to start with the high-level stuff. The 3 main areas being:

Goals

Time horizon

Risk tolerance and capacity

These 3 factors will be used to determine the mix of assets that you choose, just as the allergies of your guests will affect what ingredients you buy.

The ingredients of your asset allocation are called asset classes and subclasses.

For each asset class and subclass, you will need to choose how much of each to include in your portfolio. Again, this decision relates back to your goals, investment time horizon, and risk.

Method

Choosing the right mix of assets in your portfolio is not as simple as throwing a few ingredients into your shopping cart - it requires time, analysis and regular review.

There is no such thing as the perfect asset allocation. Each investor is different and is looking for particular outcomes from the portfolio. Your main aim with your asset allocation is to find a balance between different asset classes and subclasses that allows you to achieve your required returns without taking on more risk than you are comfortable with.

That sounds straightforward, but it’s a pretty tough task! As a starting point, get guidance from a professional financial planner. They’ll be able to sit with you and go through what you want to achieve, what you value most, the time horizon of your investment strategy and your risk profile. This process will give you both the information necessary to create the right recipe (portfolio) for you.

Keeping A Balanced Diet

All parents and grandparents will know what I mean when I talk about the toddler food strike. The three-year-old that loved avocado last week simply refuses to eat it this week. It turns out that changes in culinary preferences are not specific to toddlers. Our taste buds tend to change as we get older or when our hormone levels change (for instance during pregnancy). Similarly, when it comes to our goals or our risk tolerance, what we wanted three years back might not be what we need now.

This does not imply that you should change the recipe, your asset allocation, just because time has passes. If anything, the best recipes tend to stand the test of time. Nevertheless, we have talked about change and transformation at length in our blogs. We couldn’t be more aware of the fact that all of us are ever changing. As our investment goals, time horizons and risk tolerance change, we need different things from our investments at different stages.

The one thing that should be constant, is reviewing your asset allocation at regular yearly intervals. If the market readjusted your asset allocation without your permission (for instance if stocks fell a lot and bonds rose), or if your specific situation changes (i.e. selling a house, retiring, one spouse stops working etc.) then it is important to rebalance to bring your portfolio back to its original recipe. Adjust the mix of assets to make sure that your mix is right for the you of TODAY and not the one from 20 years back.

Regardless if you decide to cook up your own recipe or seek guidance from a financial advisor, it is important to remember that although we change, we need to keep our emotions in check. Reacting to rash emotions like fear and greed can cause havoc in your portfolio. Any changes you make to your mix of assets needs to be thoughtful, rational and strategic. Easy to say, but often hard to do!

Asset Allocation:

The Perfect Recipe

In this article: Asset allocation is a crucial part of a financial plan. Learn more about how to create your perfect mix of asset classes and rebalancing existing plans.

What Is For Dinner?

Ingredients

In a similar vein, when you are deciding on the asset allocation of your investment portfolio, you need to start with the high-level stuff. The 3 main areas being:

Goals

Time horizon

Risk tolerance and capacity

These 3 factors will be used to determine the mix of assets that you choose, just as the allergies of your guests will affect what ingredients you buy.

The ingredients of your asset allocation are called asset classes and subclasses.

For each asset class and subclass, you will need to choose how much of each to include in your portfolio. Again, this decision relates back to your goals, investment time horizon, and risk.

Method

Choosing the right mix of assets in your portfolio is not as simple as throwing a few ingredients into your shopping cart - it requires time, analysis and regular review.

Keeping A Balanced Diet

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Disclosure: This page is not investment advice and should not be relied on for such advice or as a substitute for consultation with professional accounting, tax, legal or financial advisors. The observations of industry trends should not be read as recommendations for stocks or sectors.

Investment advisory services are provided by Zoe Financial, Inc. (Zoe Financial), an investment adviser registered with the U.S. Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training. Learn more about Zoe Financial on the SEC’s Investment Adviser Public Disclosure website. Brokerage services are provided by Zoe Securities LLC and Apex Clearing Corporation, members of the Financial Industry Regulatory Authority Inc. (FINRA) and Securities Investor Protection Corporation (SIPC). Learn more about Zoe Securities and Apex on FINRA’s BrokerCheck website.

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