What the Heck is Asset Allocation Anyway? (And Why Should You Care?)

When it comes to investing, you’ll hear the term “asset allocation” bandied about, often in conjunction with the phrase “rebalancing a portfolio”. Why should you care about that stuff, if you aren’t super-interested in investing?

Well, you’ve probably heard the phrase “Don’t put all your eggs in one basket”.

Your portfolio is like a bunch of different baskets, and the money you’re not planning to spend in the next 5 or more years is like a whole bunch of eggs.

All asset allocation really means is figuring out which eggs to put in which basket (or where all to put the money you aren’t going to spend or give away.) Rebalancing a portfolio means putting your eggs back the way you wanted them if some of the baskets have gotten too heavy. (Which can happen pretty easily.)

Putting all of your eggs in one basket is fine, IF you never stumble and fall, no one ever steals your basket of eggs, the eggs don’t go rotten, etc.

In other words, putting all your eggs in one basket is a bad idea because it’s pretty easy for something to happen to a single basket of eggs. And chances are we’re all going to stumble and fall at least once during our life. When that happens, you don’t want to be left with nothing but a basket of smashed or rotten eggs — or nothing at all.

So even if your eyes don’t light up at the thought of checking Google finance as soon as the market opens each morning (or if you don’t even know when the market opens), you should care about your own future.

It’s up to you to either regularly make sure you have the right mix of baskets and eggs, or to make sure that the people you’ve left in charge of your money really do know what they’re doing, and that they’re reputable. No one cares about your money like you do (or will, if you run out).

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One comment

  • This is the bane of my financial life…which is why my 401k and our Roth IRA are in target date mutual funds. My husband also invests money into individual dividend-paying stocks. Finally, we have an emergency fund in a low-risk online account.

    Diversifying isn’t fun for me, but it is indeed necessary. Thanks for the reminder!