Choosing an asset allocation
5 years of research. 5 million Vanguard households. What we learned about everyday Americans’ financial choices can help you move through the investing world with confidence. Let’s start at the beginning with one of the first and most important decisions you make when you start investing: your asset allocation.
Investments come in 3 basic flavors: stocks, bonds, and cash. You can combine these flavors every which way to make all sorts of interesting investing creations, but the basic ingredients are always the same.
Your asset allocation is how much of the money in your portfolio you want represented by each of these flavors. Maybe you’re a 40% stocks, 60% bonds kind of person. Or maybe 20% stocks, 50% bonds, 30% cash is more your speed. Everyone’s mix is different, and it all comes down to your goals, time horizon, and risk tolerance.
If you look at risk as a spectrum, stocks are on the higher end, bonds are in the middle, and cash is on the lower end. So a stock-heavy portfolio is riskier than a bond- or cash-heavy portfolio.
Most people recognize the dangers of taking on too much investment risk, but as it turns out, not taking on enough risk can be just as problematic—though you may not lose as much money, you may also make less, and your investments may not keep up with inflation.
You want your portfolio’s risk level to give your money a chance to grow without exposing you to oversized losses in the event of a market downturn. It’s all about finding balance.
The investment choices you make are personal. There’s no “right” or “wrong” way to build a portfolio—only right or wrong for you. Establishing your goals, timelines, and risk tolerance is a great way to get started. Visit us at vanguard.com/AssetAllocation to learn more.
Your asset allocation is one of the most important choices you'll make as an investor. This video explains what it means—and why it matters.
Our financial advice can help you choose an asset allocation that's right for your goals, time horizon, and risk tolerance.
Please remember that all investments involve some risk. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account.
There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.
Investments in bonds are subject to interest rate, credit, and inflation risk.
Diversification does not ensure a profit or protect against a loss.