Determining Your Ideal Asset Allocation

Recently, I wrote about creating an asset allocation appropriate for your goals.  (You forgot already?  It was only yesterday.)  In a comment on that post, The Dividend Guy commented about sending readers interested in finding their ideal asset allocation to

That got me thinking: there are a number of asset allocation tools out there.  If you have no idea where to put your money in order to meet your goals, they can serve as good inspiration as to how you should invest.  Even if you do know how you want to invest, viewing different portfolios to see what other sources recommend can help you to expand your perspective and perhaps even provide a way to improve your own investments.  If you want to see some different asset allocation tools, here are a few of my favorites:

Index Fund Advisors – IFA offers a risk capacity survey that covers a lot of information about investing in index funds (as you’d probably guess).  The survey covers both subjective measures of risk tolerance (such as the worst potential decline you would be willing to accept) as well as objective questions (your current savings total and annual earnings).  With this information, they build a portfolio from their funds that will fit your needs.

CNN/Money – The official site of Money Magazine also provides an asset allocation tool that asks about risk as part of its asset allocation process.  While much shorter than the other assessments listed here, it does provide a thumbnail view of what considerations can be made when trying to decide your risk tolerance.

Vanguard – My personal favorite mutual fund company offers their own risk assessment test, similar to IFA.  They make a point of noting some of the worst historic declines in stocks and bonds over the past few decades (which, interestingly enough, both occurred from September to November of 2009) and asking how the investor would (or did) react.  It also makes a point of asking about the investor’s experience and comfort level with a variety of investment vehicles.

Sharebuilder – Sharebuilder, as with many investment sites, provides a tool to determine your ideal asset allocation.  Their Portfolio Builder tool (which you need to sign up with Sharebuilder to use) enables you to create a custom portfolio of ETFs and set up an automated investment plan.

I could go on, but suffice it to say that just about every online money website, from the purely informative to those attached to brokerages, will have a risk tolerance or asset allocation tool if you look deeply enough.

There are a few things to keep in mind with these tools, though.  They are all created by people or organizations who have their own beliefs and inclinations.  As a result, you can enter essentially the same information in all four of these tools and come up with four substantially different suggested allocations.  Furthermore, it’s worth considering all such risk determining quizzes with a grain of salt.  Even if you experienced losses in a previous downturn and provide your actual response to said losses, there’s no certainty that you will behave the same during the next downturn.  (Which will likely unfold in a different way, when you are at a different stage in you life.)

Ultimately, the prime determinants of your asset allocation should be your needs and your time frame, not how much risk you feel you can handle.

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