How much equity should I have? OR What should your asset allocation be?

In this session, you will learn about the optimal asset allocation, with a focus on equity allocation by age. Let's look at how to allocate your cash for optimum growth potential and risk control.

What is Asset Allocation?

Asset allocation is the strategic distribution of an investor's portfolio across different asset classes, such as stocks, bonds, cash equivalents, and alternative investments. In simple words, asset allocation is like putting your money in different asset classes to manage risk and maximize potential returns.

The goal of asset allocation is to achieve a balance between risk and return by diversifying investments across various types of assets with different levels of risk and return potential.

Here's an example to show optimal investment allocation:

Let's consider an investor named Sarah who has $100,000 to invest. Sarah is 35 years old, has a moderate risk tolerance, and is investing for her retirement, which is still several decades away. Based on her financial goals and risk profile, Sarah decides on the following asset allocation:

Equities (Stocks): 60%
Bonds: 30%
Cash Equivalents: 10%

How to determine optimal asset allocation by age?

Your asset allocation should be purely based on your risk attitude and risk capacity. A thumb rule one could follow to begin with their asset allocation is as follows –

EQUITY ALLOCATION = 100 – Current Age