What is asset allocation?
Asset allocation—or the mix of investments in your portfolio—refers to how your money is divided among different types of investments, such as stocks, bonds, and cash.
Asset allocation basics
Your asset allocation is one of the most important elements of long-term financial success. By diversifying your portfolio in a way that makes you feel comfortable, you can balance risk with potential returns.
Asset allocation refers to how your money is divided among different asset classes, including stocks, bonds, and cash. As the framework for your investment strategy, it plays a powerful role in managing both the growth and risk potential in your portfolio. Holding the right mix of these assets can help you manage the level of risk and reward potential in your portfolio over time. An asset allocation that is off balance, however, may jeopardize your ability to meet your investment objectives.
The right mix for your portfolio will depend on two key factors, namely, your time horizon and tolerance for investment risk. Time horizon is how long you have before reaching your investment goal, like retirement. Your risk tolerance reflects how much fluctuation in portfolio value you're able and willing to withstand. Generally, the longer you have until your goal, the more risk you can take.
T. Rowe Price's sample retirement portfolios offer a good example for review. They include ranges of the asset classes to accommodate risk preferences while considering allocations appropriate for various ages and time horizons. As you move closer to retirement, adding bonds and later cash can help lessen the impact of the short-term ups and downs.
Interested in understanding more about your portfolio's asset allocation? Visit troweprice.com/assetallocationplanning to ensure your mix of investments aligns with your goals.
Benefits of diversifying your portfolio
A properly diversified portfolio can help provide a cushion for the ups and downs of any single investment. Aligning your asset allocation with your personal risk tolerance and time horizon can boost potential returns while keeping you on track with your evolving goals.
So how can you diversify your portfolio? By investing in a variety of asset classes—such as stocks, bonds, and cash. Each type has its own strengths and limitations, and together they can help you maintain a diversified portfolio.
Driving growth with stocks
Stocks are typically the main driver of your portfolio’s growth. They have the potential to generate greater returns compared with other asset classes—like bonds or cash—but they also carry more potential for risk.
Driving growth: The strategic role of stocks in diversified portfolios
Stocks have the potential to generate greater returns compared to other asset classes, like bonds or cash. This typically makes them the main driver of your portfolio's growth. But stocks also carry more risk. When market volatility occurs, it can lead to sharp, sudden increases or decreases in stock value. Investors with a longer time horizon and the discipline to stay invested during periods of volatility can benefit from the higher, long-term growth potential stocks offer.
While stocks have historically offered higher average returns over time compared with bonds and cash, they come with more downside potential, especially over shorter time frames. Diversifying across stocks by market capitalization—which is a way of measuring a company's size and market share, such as small-cap, mid-cap, or large-cap—can help balance the higher growth potential of smaller companies and geographical regions with a greater relative financial stability of larger companies and more mature economies.
How much of your portfolio should be allocated to stocks? If you have decades until retirement, you can take advantage of stocks' long-term growth potential because you'll have time to ride out market downturns. As retirement nears, you'll want to include stocks in your portfolio but with a smaller allocation than younger investors.
Allocating a portion of your portfolio to stocks can also help you address a few common challenges, like longevity risk and inflation risk. Longevity risk refers to the possibility of outliving your savings. Stocks can give your money the growth potential needed to last even a longer-than-expected lifetime. Inflation risk is the potential that your purchasing power can be reduced over time as prices rise. Stocks have the potential to grow faster than inflation.
Understand more about the role of stocks in your asset allocation. Visit troweprice.com/assetallocationplanning to ensure your mix of investments aligns with your goals.
Asset allocation by age
These asset allocation strategies for retirement goals are based on an assumed retirement age of 65 and a 30-year withdrawal period. For a more personalized asset allocation model based on your information, check out our Portfolio Optimizer tool.
Focused on growth
Mostly equity: 90%–100% stocks
Some fixed income: 0%–10% bonds
Diversification cannot assure a profit or protect against loss in a declining market. These allocations are age-based only and do not take risk tolerance into account. Our asset allocation models are designed to meet the needs of a hypothetical investor with an assumed retirement age of 65 and a withdrawal horizon of 30 years.
The model asset allocations are based upon analysis that seeks to balance long-term return potential with anticipated short-term volatility. The model reflects our view of appropriate levels of trade-off between potential return and short-term volatility for investors of certain ages or time frames. The longer the time frame for investing, the higher the allocation is to stocks (and the higher the volatility) versus bonds or cash.
Limitations
While the asset allocation models have been designed with reasonable assumptions and methods, the tool provides models based on the needs of hypothetical investors only and has certain limitations:
- The models do not take into account individual circumstances or preferences, and the model displayed for your investment goal and/or age may not align with your accumulation time frame, withdrawal horizon, or view of the appropriate levels of trade-off between potential return and short-term volatility.
- Investing consistent with a model allocation does not protect against losses or guarantee future results.
Please be sure to take other assets, income, and investments into consideration in applying asset allocation models to your individual situation. Other T. Rowe Price educational tools or advice services use different assumptions and methods and may yield different outcomes.
How is your portfolio allocated?
Understanding what’s in your portfolio, your risk tolerance, and when you’ll need your money (or your time horizon) are all key factors when it comes to making smart decisions about your asset allocation. You could be missing out on growth opportunities or introducing risk to your portfolio without knowing it.
Holding the right mix of assets is essential for achieving long-term investing success. These include stocks, bonds, and cash, and each one can play a different yet important role in your portfolio. Stocks are generally the main driver of growth, while bonds can balance the risk of stocks and provide income. Cash offers liquidity, which becomes increasingly important as you near and enter retirement.
How much you choose to allocate to each asset type will depend on your time horizon, risk tolerance, and investment goals. The more time your portfolio has to grow and recover from short-term market movements the more you might allocate to a riskier asset class like stocks. But as your timeline to ride out market volatility shortens, you might include more bonds and cash.
If it's been a while since you took a close look at your portfolio, reviewing your current asset allocation using T. Rowe Price's Portfolio Optimizer can be a great place to start. Available to T. Rowe Price clients, this digital tool can help you compare your current portfolio to a target asset allocation of your choice that aligns with your personal risk
tolerance, all in less than two minutes.By providing foundational information on potential asset allocations for your situation, the Portfolio Optimizer can help you make more informed decisions about how your money is invested.
Visit troweprice.com/assetallocationplanning to ensure your mix of investments aligns with your goals.
Portfolio Optimizer
See how your current portfolio measures up to a Target Asset Allocation that you select with our Portfolio Optimizer. It only takes a few minutes.
How to manage your asset allocation
- Balance the potential risks and returns that come with different asset classes.
- Revisit your asset allocation periodically to help your investment strategy stay aligned with your goals.
- Rebalance your portfolio to keep it in check with your time horizon (or the amount of time your money will be invested before you need it), risk tolerance, and shifts in the market.
Partner with an advisor
Looking for personalized advice? Together, you and an advisor can design a plan to help you save for a secure retirement.
All-in-one funds
Designed to simplify your asset allocation, our all-in-one funds are rebalanced over time by experienced investment professionals—so you can have one less thing to think about when it comes to diversifying your portfolio.
Target date funds
Designed to adjust over time based on an intended retirement year, these funds offer a range of solutions to help you meet your retirement objectives.
Asset allocation funds
Access a wide range of investments in one fund that can help you work toward broader financial goals with varying time horizons.
Insights
Get the latest from our thought leaders on the markets, retirement investing, and financial planning.
What’s the best approach for portfolio rebalancing?
There are advantages to letting technology help you maintain an appropriate level of risk in your portfolio.
Why purposeful asset allocation is key for long-term success
Planning your asset allocation for retirement.
Subscribe to T. Rowe Price Insights
Receive monthly retirement guidance, financial planning tips, and market updates straight to your inbox.
T. Rowe Price Insights delivered to your inbox
Receive monthly retirement guidance, financial planning tips, and market updates to help you make confident decisions about your finances.
By subscribing, you agree to receive occasional emails about our products and services. The Privacy section of our Help Center has information about how to opt out or update your preferences. This offer is intended for persons in the United States and should not be considered a solicitation or offering or any investment products or services to investors residing outside the United States.
How we can help
Portfolio Optimizer
Compare your current asset allocation to a target that aligns with your goals.
Talk to us
Speak with a Financial Consultant for general investment guidance and educational resources.
Monday–Friday, 8 a.m.–8 p.m. ET.
Financial advice solutions
We offer different levels of advice that can help you achieve your goals and build a secure financial future.
202504-4321364