Asset Allocation
By Ethan Yan | April 11, 2026
IntroDuction
When purchasing assets in different accounts or storing your cash in certain accounts, you're participating in a process called asset allocation. We’ve already talked a lot about what you can invest in and where you can allocate your cash, but now we want to answer how do we do it?
Unfortunately, there isn’t a straightforward answer. Your asset allocation will depend on your current financial situation, future endeavors, risk tolerance, and time horizon. Despite that, let’s try to figure out where we stand and how we can achieve our financial goals.
Risk Tolerance
How much risk are you willing to take with your money? Risk tolerance is a measure of your reaction to potential loss, whether it’s for a short period, longer period, or permanently. I want to talk about three aspects/scenarios you should reflect on: Emotional Aspect, Financial Side, and Time.
Emotional Aspect: When the investment you purchased drops in value, would you panic and sell? Perhaps you would just hold on to what you have until it rebounds. Maybe you’re confident in the purchase, so you decide to buy more of it. If you’re the type to have panic reactions, you may be more risk averse and play it conservatively. If you hold onto what you have, expecting a rebound, you may be more moderate. The last option is more aggressive, as you’re putting money into the asset, but the future is uncertain.
Financial Side: Where are you at in life? Do you plan to make a big purchase soon, or have large loan payments? Maybe living close to paycheck to paycheck? Perhaps you’re going to get an increase in your ordinary income. Regardless, the more responsibilities you have, the less risk you should realistically take, as liabilities should always come first. Money you may need soon shouldn’t be heavily exposed to risk. If you’re going to make a large purchase, it might be smarter to be more conservative or moderate, as the risk of losing money is a real danger. Not to mention having a cushion for emergencies, so a decent amount of cash may also be smart.
Time: The older you are, the less time you have. People who are younger can take on more risks since they have more time to recover. As you get older, the risk of losing money increases, as you have less time to bounce back. You may not have time for an asset to rebound, so it may be smarter to be more conservative as you get older (closer to retirement age).
People who are younger are typically more risky, as they have less responsibilities, while also having less time. The older you are, the more risk averse you may be, but it may not always be the case if you’re in a financially comfortable situation. Although there are online tests you can take to get a rough understanding, I think it’s smarter to either talk to a professional, or to truly understand yourself in your position.
Click this to test your risk tolerance.
Remember, you don’t have to fit perfectly into a category as most people fall in between each category. You most certainly won’t keep the same values in the future as you do now, so don’t box yourself into these categories.
Asset Allocation
Now that we know where we might stand in risk tolerance, we can guide ourselves to an idea of how we can allocate our money in a way to achieve financial goals. We want to look at stocks and bonds, as they serve a specific role in your investment strategy. Stocks are focused on growth, providing higher reward, but more prone to risks. Bonds are focused on stability, providing consistent reward, less risk, but never achieving the same highs as stocks.
| Stocks | Bonds | |
|---|---|---|
| Aggressive | 70% to 90% | 30% to 10% |
| Moderate | 40% to 70% | 60% to 30% |
| Conservative | 10% to 40% | 90% to 60% |
Look at Figure 1; notice how it’s not a simple one number answer. Within each category, you can range between any of those stock percentages. If you’re moderately aggressive, you may lean towards 70% stocks and 30% bonds. If you’re super conservative, you can just be 100% bonds. Figure 1 is just a rough framework on what you can be.
For example, I’m at a point where I’m likely not going to make a huge purchase anytime soon. However, I have college loan payments and currently low income. As you can tell, I’m still very young (24), so I have a long time horizon for when I’ll retire. I’m willing to sacrifice personal purchases to invest, so I’m still following my own personal guidelines to never overspend with what I have to work with. I’m moderately aggressive, so I’m going to invest more in stocks than bonds. As time goes on, it’ll change, as I want to own my own house one day, so I may need liquidable cash to prepare for that big purchase, making me more conservative. It’s all really based on your situation, as it differs from everyone else.
Let’s now bridge diversification and asset allocation together. In my previous blogs, I highly recommended investing in Market Index ETFs/Funds, as they serve consistent long growth, with relatively low risk. This is to ensure your money is diversified in stocks while maintaining growth. To further diversify, we want to look at the Three Fund Portfolio. I’ve learned this from Humphrey Yang, which I recommend watching as he explains how you can start it:
The Three Fund Portfolio splits it to: Domestic Stock Market / International Stock Market / Total Bond Market. So for example, if you chose 70% Stocks and 30% Bonds, while applying the Three Fund Portfolio, you may split it up to 40% Domestic Stock Market, 30% International Stock Market, and 30% Bonds.
For example, I’ve invested in FZROX (Domestic) and FSPSX (International). I’m not going to say how much I’ve invested, but I will say I’m following a 45/35/20 rule currently, which may change soon depending on some market prospects. Again, this isn’t investment advice, but I’m showing examples of what I am applying based on my own research. Granted, most of my investment strategies are in a tax-advantaged account, simply because I don’t make enough yet to really start my brokerage account.
Another thing I want to recommend is to use this website to figure out what your investment composition is; basically what companies are they purchasing from. What you don’t want to happen is an overlap in companies, sectors, themes, etc. You think you’re diversifying, but you’re not if your bonds are from the same companies as your stock. I highly recommend comparing them before you purchase them! This website is a great tool for.
Risk and Return
If you don’t have an idea on what HYSA, MMAs, IRAs, or Brokerage Accounts are, I highly recommend reading my blogs about them, or do some independent research on their functionality. What I want to mention is depending on your account type can also dictate how you should invest or what to invest in. In this section I want to focus on the purpose of your accounts and what you might want to invest in in those accounts.
Roth IRA (Passive)
Amazing for mostly passive investments, as this money is for retirement and shouldn’t be treated as an active account. We want to secure consistent and stable growth in our investment. We want to avoid actively selling as we won’t be able to abuse its retirement aspects.
Superior for long term growth stocks, predominately in Mutual Funds as you won’t be moving money around constantly and you get to avoid the capital gains issues.
For most, you want to play the long game, therefore your risk tolerance should play a small role. You’re not looking to make a lot of money, rather, you’re focusing on stability and consistency. Passive ETFs and Index Funds are great for this account type.
You should still apply the three fund portfolio for diversification, however you should focus on consistent and passive investments.
Low Risk and Consistent Returns
Brokerage account (active)
Although I say active, it can also be passive. I have a further breakdown in my blog post on ETFs, but the shortened version is that if you want to actively be on the market, this account is the best to do so. You can make more money (at least in the short-term) with this account by being active. Still the best way to beat inflation.
Fantastic for practicing your asset allocation and risk tolerance. Here you can focus on riskier types of investments based on your risk adversity.
Focus on more Active ETFs or Mutual Funds, as they can help diversify your investment, but still provide higher yields/capital gains.
This account isn’t guaranteed money, nor is it as liquidable as other cash/cash equivalents, so be sure to not put all your money into this account.
Can be Higher Risk and Greater Returns
hysa and mmas
In case you’re wondering, these accounts aren’t for investing, but they still offer higher interest rates than the normal savings and checking account. They’re a great option to hold cash, just remember that HYSAs aren’t as easily accessible, so if you need the money instantly, that can be a problem. Although it’s an easy fix, just have money at hand in a checking account or MMA. This is not to be confused with investors holding cash reserves/equivalents in their investment portfolio, which is a dollar amount or percentage of their total portfolio.
Time Horizon & Rebalancing
Time Horizon is more than just knowing when you’ll want to retire or from ceasing to exist. It also means knowing when your future wants and needs will come into play. If you plan to buy a house soon or have children, having more liquidable assets like cash, CDs, and treasury bills would be the smarter decision, rather than investing it into your Roth IRA/Brokerage account, where it’s limited in accessibility and more exposed to risk.
However, I always wondered how investors would calculate how much they would need as “emergency” money without knowing their full time horizon. What I’ve learned is to keep a cash reserve in your investment account based on your total portfolio value.
Part of your total portfolio should be in cash. You can decide the amount, whether it’s a percentage or dollar amount. I’d say for a beginning, it’s easier to have it as a dollar amount. As your portfolio grows, percentages would be more logical.
You can download this google sheet I made that can help you understand it better: Target Asset Allocation Sheet
What this means
Don’t add more money into your account to achieve your cash reserve. You may want to have auto-reinvest off so that it can collect as cash until you reach your cash reserve goal.
You want to avoid selling assets as it can be a lot more work when you start to recognize capital gains/loss.
What you want to avoid
You’ll also notice that this section mentions rebalancing. When you have a portfolio rule, whether it’s a three fund or just a 70/30, your individual assets may exceed its value in your total portfolio. You want to rebalance by focusing money gained from the bigger asset to the underweighted asset. My google sheet helps with that, which has a guide in there as well.
Concluding Thoughts
Before we purchase any assets, we want to figure out our risk tolerance and our current financial situation. Know those two factors can really dictate the quantity and type of investment you should purchase. Remember to also diversify even if you are an aggressive investor. Although I’m not an expert in this field, nor am I really giving investment advice, I’m doing my best to help you and myself in this investment journey! Again, please do thorough research before you purchase an asset, it’ll reduce the uneasiness when you’re confident in your purchases.
SOURCES
(Retrieved April 9, 2026). Asset Allocation and Diversification. Investor.gov. https://www.investor.gov/introduction-investing/getting-started/asset-allocation
(Retrieved April 9, 2026). Asset Allocation and Diversification. Finra. https://www.finra.org/investors/investing/investing-basics/asset-allocation-diversification
(Retrieved April 10, 2026) What Percentage of Cash Should Be In My Portfolio? US Bank https://www.usbank.com/investing/financial-perspectives/investing-insights/percentage-of-cash-in-my-portfolio.html