What Is Asset Allocation?

Asset allocation is an investment strategy that seeks to diversify investments among different asset classes—such as stocks, bonds, and cash to reduce risk and maximize returns. It is a key factor in modern portfolio theory, which suggests that investors should spread their investments across different types of assets to help manage volatility and optimize growth potential.

The goal of asset allocation is to create a balanced portfolio where each class works together to achieve better results than any single asset on its own. By understanding how various assets interact with one another, investors can create portfolios tailored to their individual needs and goals.

What is an Asset Class?

An asset class is a group of financial instruments that have similar characteristics and behave similarly in the marketplace. Generally, most investors recognize five main asset classes: stocks, bonds, cash equivalents (like money market funds), alternatives (like real estate or commodities), and short-term investments.

Each class has different risk profiles associated with it and offers unique opportunities for potential return on investment. It’s important to understand the differences between each class to determine which is right for you as an investor.

By diversifying your investments across multiple asset classes, you can protect yourself from drastic losses while still reaping rewards from potentially successful investments. In this way, asset allocation helps to maximize returns while minimizing risk.

What are Asset Classes and How Many Are There?

There are various asset classes to which investors allocate their assets. The key asset classes include stocks, bonds, mutual funds, ETFs (exchange-traded funds), and cash assets. Each class has its own unique characteristics and risks associated with it. Asset classes tend to have different levels of risk, return potential, and liquidity.

Stocks are considered a risky class because they carry the potential for both high returns and losses depending on market movements. Bonds typically provide lower returns but also come with less risk than stocks. A mutual fund is a fund investment that allows investors to purchase a variety of related securities within one portfolio.

ETFs invest in baskets of securities just like mutual funds but trade on an exchange like a stock. Finally, cash is usually seen as the least volatile class due to its stable value and low return potential.

What is the Difference Between Asset Allocation and Diversification?

Asset allocation is an investment strategy that involves spreading investments among different asset classes to reduce risk and maximize returns. Diversification is a similar strategy that seeks to spread investments across different markets, sectors, and securities to reduce risk through diversifying holdings.

The main difference between asset allocation and diversification is that asset allocation focuses on spreading investments among asset classes while diversification focuses on spreading them across markets, sectors, and individual stocks/bonds. Both strategies are important for reducing portfolio risk and can be used together to create a well-balanced portfolio.

How does Risk Tolerance Affect Asset Allocation?

Risk tolerance is an important factor in determining an individual’s asset allocation. Risk tolerance refers to the amount of risk a person is willing and able to take on when investing. Generally speaking, the higher the risk, the higher potential for returns but also the greater potential for losses. On the other hand, lower-risk investments tend to provide more predictable returns with lower potential for losses.

When building an asset allocation plan, risk tolerance should be taken into consideration in order to choose investments that are appropriate for the investor’s situation. For example, a person with higher risk tolerance may choose their portfolio’s asset allocation more towards stocks, while someone with lower risk tolerance may opt to have more bonds or cash in their portfolio.

For more than a decade the stock market has seen interest rates rise. So with it have come higher-risk investments and bigger investment returns. But if you have an aggressive portfolio as opposed to a more conservative portfolio it is quite possible that all your eggs and other assets could make you lose money. It’s ok to tolerate risk but too much can make a stock allocation go to waste. No matter the past performance or lifecycle funds.

Investment Portfolio Rebalancing

Once an asset allocation plan has been created, it should be monitored and adjusted regularly to ensure that it remains consistent with the investor’s goals and risk tolerance. This process is known as portfolio rebalancing and involves periodically adjusting the weightings of each asset class in order to maintain a desired level of risk.

For example, if commodity prices rise significantly, then a portfolio may need to be rebalanced to lower its exposure to commodities to remain within an acceptable level of risk.

It is recommended by most experts that you review your portfolio once or twice a year to assess its performance. If any of your holdings are underperforming, you may need to rebalance by selling certain securities and acquiring others to bring your asset allocation back to the desired level.

Target Date Funds

Target date funds are an increasingly popular way to invest for retirement. These funds provide a pre-set asset allocation plan that automatically adjusts the portfolio mix as the target date for retirement approaches. By investing in a target date fund, investors do not need to worry about managing their portfolios or adjusting allocations over time as the fund is managed by professional managers.

Next Gen offers ways to create a low risk investment plan that has a target date for allocation

Investors can choose from several different target date funds depending on their individual needs and goals. Each fund has its own unique asset allocation model so it is important to research each one carefully before making a selection. Ultimately, target date funds provide a convenient and low-maintenance approach to long-term investing without sacrificing returns or taking on too much risk.

Next-Gen Financial Planning is a fee-only financial planning firm serving young professionals in San Diego and around the country. Get personal guidance you can trust for help with student loans, tax planning, investing, budgeting, and much more from a team built to work with people like you. We are not your father’s financial planner!

How should you use the following accounts? How much should be in each?


Checking accounts should be used as an easy and convenient way to manage day-to-day expenses. Generally, it is recommended that individuals keep enough in a checking account to cover all of their expected short-term costs such as rent, groceries, bills, etc., but it’s also important not to keep too much in the account.


Savings accounts should be used for short and long-term goals, such as saving for a down payment on a house, college tuition, or retirement. It is recommended that individuals keep at least 3-6 months of expenses in savings for emergency funds and other unexpected costs.

Savings are a very useful way to accomplish your dreams and are very low risk

Money Market/High Yield Savings

Money market and high-yield savings accounts should be used for short-term investments that have a higher return than a traditional savings account. Generally, it is recommended that individuals keep enough in these accounts to cover any large purchases or investments they plan to make within the next year or two.


Certificates of deposits (CDs) should be used for long-term savings or investments. CDs usually have higher interest rates than savings accounts and provide a safe, stable form of investment. It is recommended that individuals allocate enough funds to cover their long-term financial goals, such as retirement savings.


Brokerage accounts should be used for active stock and bond investing. It is recommended that individuals allocate enough funds to meet their desired level of investment activity and diversify their investments among stocks, bonds, and other asset classes.


Retirement accounts such as IRAs and 401(k)s should be used to save for retirement. It is recommended that individuals keep enough funds in these accounts to meet their retirement goals.

Do You Need Help With Asset Allocation?

Using an asset allocation calculator is important because asset allocations can be all over the place. An allocation to fixed income also might keep you consistently making money for longer periods.

But the best way to make sure you aren’t losing money and aren’t reading the financial markets wrong is to call NextGen Financial Planning in San Diego. They know exactly what makes asset allocation important and are true to their principles.

Why Choose NextGen Financial Planning?

We believe that financial planning should be:

  • Centered around the real people whose lives are impacted by financial decisions
  • Values-driven (yours, not ours!)
  • Focused on questions that matter
  • Thorough
  • Action-oriented
  • Tech-empowered
  • Ongoing

Once we have a clear picture of where you are now and where you’re going, we’ll create a clear step-by-step action plan together. As life happens along the way, we’ll be right by your side to keep you on track.

Our shared client portal helps make sure that we each always know exactly what needs to be done to transform your vision into reality, and our annual service calendar serves as a backstop to make sure we don’t ever let important financial planning topic areas slip through the cracks and go too long without review. We know the right asset allocation isn’t the same for everyone so we love to work with our clients to ensure they feel heard.

We believe a good financial plan covers a wide range of topic areas including cash flow, tax planning, estate planning, investment analysis, risk management, and many others. What makes a good plan great, however, is ensuring that all those decisions are aligned with the core values and life goals of the real people behind the spreadsheets.

We don’t optimize for maximizing net worth, we optimize for maximizing life impact and the probability of accomplishing the things that are most important to you. We truly care for our clients and love the impact that we can help create when they’re open to deeper dives.

At Next Gen Financial Planning, we can help prepare you for your financial future

Contact Us Today!

At NextGen Financial Planning, we provide a comprehensive financial planning process to help you develop the right asset allocation for your goals and lifestyle. To get started, contact us today for a complimentary consultation with one of our financial advisors.

Frequently Asked Questions

What Is NextGen?

Next-Gen Financial Planning is a relatively recent approach to personal financial planning that seeks to equip investors with the tools and strategies needed to make sound financial decisions based on their individual circumstances. It is focused on integrating all aspects of an individual’s financial life, allowing them to prioritize their short-term and long-term objectives with greater clarity.

Unlike traditional models, it takes into consideration human behavioral factors such as emotion, which can often lead to maladaptive decision-making when it comes to money. NextGen Financial Planning has the potential to revolutionize traditional practices and ultimately assist individuals in planning for the future more strategically.

Why Is Investing Important?

Investing is important because it allows people to grow their money over time. When done correctly, investing can provide individuals with a way to save for retirement, pay for college, or simply create a nest egg that can be used in case of an emergency. Additionally, by investing in stocks or mutual funds, people can share in the growth of businesses and economies around the world.

Should I invest In Stock or Mutual Funds?

Deciding whether to invest in either can be confusing. Many people are unsure of which choice presents the most potential for return on investment, or even when and how to begin investing. Fortunately, there is a team of experts available to help – Next Gen. We offer comprehensive wealth management services that evaluate not only the opportunities that exist with each stock and mutual fund option but their associated risks as well.

They use this information to create a diversified portfolio tailored specifically to your needs and preferences – one designed to help you reach your financial goals. Investing doesn’t have to be an intimidating experience – with Next Gen’s guidance, you can build a secure financial future with ease.


Want to see if we're right for you?
Take the first step by scheduling an intro meeting

Isn’t it time you got the real financial planning advice you’ve always wanted? The first meeting is on us.
There’s no cost, no sales pressure, and no judgement - just a conversation to see if we’re a good match.