What Is Portfolio Allocation? Definition and Guide

What is portfolio allocation? Do you need a basic guide to learn how to allocate your assets?

To allocate your assets means to build a portfolio of investments that you’ve spread out into different categories. You split your assets into these categories based on how important they are to you and how much money you want to make.

Let’s look at how Tony Robbins describes portfolio allocation in his book Money: Master the Game, along with how to divide your money sensibly.

The Basics of Portfolio Allocation

Your assets are your money-earning investments—stocks, bonds, and commodities. So, what is portfolio allocation, and how can it help you earn money? It refers to how you divide your money among assets. In other words, to allocate your assets is to build a diverse portfolio of investments by splitting your money among different “buckets” or asset categories.

(Shortform note: Robbins also briefly discusses real estate investing and recommends investing in assisted living communities since the “demographic inevitability” of the baby boomers becoming elderly is fast approaching. Alternatively, David Greene argues that you can create passive income with his BRRRR method—Buy, Rehab, Rent, Refinance, Repeat. Put simply, you can purchase cheap properties outright, fix them up and rent them, then take out a loan against your equity in the house to purchase the next property. Rent payments cover your loan and provide passive income, and you can quickly build a large portfolio of properties.)

Robbins recommends using three “buckets” or overall divisions of your money when allocating your portfolio. Decide how to divide your money in whole-number percentages (for example, 30%, 60%, and 10%), based on your own risk tolerance and age. 

Bucket #1: Conservative investments—this bucket is for investments that will grow slowly but steadily, with relatively little risk. This involves cash (it’s important to hold some cash in case you need funds rapidly), government bonds, pensions, annuities, and life insurance policies. Be patient and hold onto these for the long term—in time, they’ll provide exponentially compounding interest.

Bucket #2: Aggressive investments—this bucket is for investments that might yield massive gains but are also high-risk. These assets include corporate stocks—through mutual funds, index funds, and exchange-traded funds—as well as real estate, commodities (such as gold, oil, and wheat), and foreign currencies.

Bucket #3: Enjoyable investments—unlike the previous two buckets, this one is for setting aside a small amount of money with which to enjoy your life now. As Robbins explains, there’s no point in getting wealthy if you aren’t living a good life along the way. Pick a small percentage and use that money to do things you love—such as taking a tropical vacation, going to the movies, or getting a new laptop. Investing in your happiness will help you enjoy life and stay moving toward your financial goals.

A Simpler Portfolio of Allocations Setup

In The Simple Path to Wealth, JL Collins cuts past “buckets” to suggest just three tools to build a complete portfolio of allocated assets:

  • Stocks—Collins advocates for investing in a specific index—VTSAX, Vanguard’s Total Stock Market Index Fund—that gives steady, regular returns.
  • Bonds—to balance your stocks, Collins suggests Vanguard’s Total Bond Market Index Fund (VBTLX). Bonds are advantageous during periods of deflation and when you’re nearing retirement.
  • Cash—although cash doesn’t earn anything, you’ll always need some on hand in case of emergencies or dropping prices. You can earn a small amount on it by placing it in a money market account, a special savings account that’s FDIC insured and offers slightly higher interest rates.

Collins emphasizes that your approach to portfolio allocation shouldn’t be overly complicated. If you’re stressing yourself out, you’re doing it wrong—instead, follow time-tested strategies and let your investments sit. This will give you peace of mind and reliable investment income. 

What Is Portfolio Allocation? Definition and Guide

Katie Doll

Somehow, Katie was able to pull off her childhood dream of creating a career around books after graduating with a degree in English and a concentration in Creative Writing. Her preferred genre of books has changed drastically over the years, from fantasy/dystopian young-adult to moving novels and non-fiction books on the human experience. Katie especially enjoys reading and writing about all things television, good and bad.

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