INTRODUCTION TO ASSET ALLOCATION AND RISK TOLERANCE

• Asset allocation is the mix of stocks, bonds and other assets in a portfolio.
• Determining the “right” asset allocation depends on personal circumstances such as age, investment objective, risk tolerance, and how much you have to invest.
• iShares Core asset allocation ETFs are designed to help investors build a diversified portfolio with one fund.

Asset allocation refers to the mix of stocks, bonds and other financial instruments in a portfolio. Deciding on your asset allocation is one of the most important decisions any investor makes. But how do you choose the breakdown of which assets — and how much — to put in a portfolio?

iShares offers all-in-one asset allocation ETFs that can do the work for you, providing a mix of stock and bond exposures with conservative, moderate, or aggressive risk targets; the key differentiator being how much of each fund is invested in stocks vs. bonds.

Here are some factors that can help you determine your tolerance for risk:

• Your age: Sometimes referred to as “time horizon,” the stage of life you’re in can help dictate your investing style and strategy. The further away you are from expected retirement age the greater your risk tolerance may be, knowing you have more time in the market ahead of you to potentially grow your assets and recover from any near-term losses.
• When do you need the money and what do you need it for? Saving for retirement requires a different strategy than saving for a child’s education, which is different than saving for a house or a “once-in-a-lifetime” vacation. Knowing your investment objective, and when you’ll likely need it, can inform your investing choices. For many, it may help to think of your investment objective in layers, and segment it based on how soon you expect to need the funds.
• How much do you have to invest? In theory, the less you have to invest, the less risk you can take. That’s especially true the closer you are to retirement, where “low risk” investments may be more suitable because you don’t have as much time to make up for losses. When you have ample money to retire comfortably — however you define “comfortably” — you can afford to take more risk as any potential losses can be absorbed and you can stay invested. For most investors, the trick is finding the right balance where you can grow your nest egg without taking on “too much” risk.
• Appetite for risk: Can you stomach short-term market volatility? How much risk are you willing to accept in the pursuit of your financial goals? These are very personal questions investors may want to ask themselves — and answer as honestly as possible. Just because you’re a “thrill seeker” in real life doesn’t mean you’ll have the same risk tolerance for your investments, and vice versa.

Figuring out your risk tolerance isn’t easy, and it can change over time — just like other aspects of your life.

Imagine, for example, you’ve just arrived at a Fourth of July picnic, hosted by friends who are serious “foodies.” There are multiple kinds of main dishes to choose from — burgers, ribs, chicken, lentils, pulled pork, marinated tofu — as well as sides ranging from chickpeas to mac n’ cheese to potato salad to couscous. There’s also plenty of chips and dip, plus a whole separate table dedicated to desserts. There’s also a wide variety of beverages — with and without alcohol.

Deciding what to eat and drink, and how much, is a bit like choosing the asset allocation for your portfolio. And just like you eat differently when you’re younger, your asset allocation, objectives and strategy for risk management probably changes over time too.

When I was in my 20s — and certainly as a teenager — I pretty much ate (and drank) whatever I wanted. That’s like being an “aggressive” investor. When you’re younger, you probably have more time in the market ahead of you and may be able to make “riskier” investments in the pursuit of higher potential rewards.

In my 30s and 40s, I realized I couldn’t (and shouldn’t) eat and drink without thinking about the potential fallout — be it weight gain or a bad hangover. Similarly, most investors are advised to reduce their portfolio risk as they age and get closer to retirement age.

I suspect I’ll be paying increased attention to what I eat and drink with each passing year. A balanced portfolio is like a balanced diet: It might not always “taste” great but you’ll likely end up happier and financially healthier by maintaining a diverse asset allocation strategy that aligns with your personal “appetite” for risk.