I received the following query regarding my asset allocation and thought I would make a post on the subject.
How did you arrive at this allocation? I’m thinking about making a passive portfolio of index funds, but I don’t know what asset allocation I should have, and Vanguard’s Investor Questionnaire only differentiates between stocks and bonds.
First, I determined the split between cash, bonds, stocks and REITs based on my age and risk tolerance. Since my spouse and I are decades away from retirement and our risk tolerance is fairly high, we have a relatively low allocation to cash (5%-10%) and bonds (20%-25%). I don’t have a very good explanation for the split between different equities other than that it is roughly split equally between Canada, US and International (EAFE and emerging markets). I also have about 5%-10% exposed to asset classes (like REITs) that have low correlation with stocks and bonds.
Some columnists like Jonathan Clements of The Wall Street Journal think that the exact details of the asset allocation (beyond the stocks-bonds split) are relatively unimportant. What is important is having a target allocation and rebalancing the passive portfolio when it deviates too much from the target.