If you were walking down the street one day and someone asked you, “what’s your asset allocation?,” would you know what you’d say? Your asset allocation is an all-important decision not to be overlooked. It can have a big impact on how your investment portfolio performs over the long haul and whether you’re able to meet your long-term financial goals like homeownership or an early retirement.

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Understanding Asset Allocation

Asset allocation is a fancy term for how much of your investment portfolio you have invested in the three main asset classes: equities, fixed income and cash. With the risk asset allocation, you can accomplish several things at once: you can take the right level of risk for your expected rate of return, be able to access your money when you need it, and let your money grow to achieve your financial goals. The easiest way to achieve the right asset allocation is with a properly diversified investment portfolio.

Your asset allocation isn’t set in stone. Sometimes life happens. You could lose your job or have a baby. As such, it’s important to remain flexible. You have to be ready, willing and able to adjust your asset allocation over time. For example, if you decide to retire early, you may allocate more of your money towards fixed income and cash (which tend to be less volatile) and less toward equities.

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Asset Allocation and Canada’s Food Guide

Asset allocation may sound intimidating, but it’s really not. To better understand asset allocation, it helps to think of it like Canada’s Food Guide. Similar to how asset allocation has asset classes, Canada’s Food Guide has food groups: vegetables and fruit, grain products, milk and alternatives, and meat and alternatives.

Your asset allocation depends a lot on your age (and gender). For example, if you’re years away from retirement, you’ll want to invest more aggressively, putting more of your money into equities and less into fixed income and cash. However, if you’re nearing retirement, you’ll want to invest more conservatively with less of a weighting in equities and a bigger portion of your portfolio in fixed income and cash.

Going back to Canada’s Food Guide, the recommended number of services per day also depends on your age and gender. For example, if you’re a female between the ages 19 to 50, it’s recommended that you have seven to eight servings of vegetables and fruit per day (eight to 10 servings per day for males in this age range). However, for females and males age 51 or older, it’s recommended that you only have seven servings per day of vegetables and fruit. Going beyond the recommended number of servings doesn’t do you any benefit and can actually increase your risk of health issues like obesity, diabetes and heart disease (especially red meat).

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Choosing the Right Asset Allocation

Your asset allocation largely depends on three key factors: your tolerance for risk, financial goals and time horizon. The right asset allocation can be achieved in a proper investment portfolio consisting of low-fee ETFs like those that Smart Money Invest offers.
Not sure about the best asset allocation for you? Contact Smart Money Invest today for help determining the right allocation to meet your long-term goals.