Selecting the asset mix that’s right for you includes balancing your risk and return while considering your risk tolerance.
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What is an asset mix?
Your asset mix is the combination of types of investments you have in your portfolio. Having a mix of assets means having a mix of different asset classes. The three main asset classes are:
- Cash and cash equivalents – Such as savings accounts, GICs and money market funds.
- Fixed income investments – Including bonds, fixed income mutual funds and fixed income ETFs.
- Equities – Like stocks, equity mutual funds and equity ETFs.
A typical investment portfolio would have some amount of each of these types of asset classes, in order to be considered diversified. How much of your portfolio is dedicated to each asset class would depend on your goals as an investor, your level of risk tolerance, and your time horizon.
There are also alternative investments like real estate or crypto assets. Alternative assets may respond to market conditions differently than the three main asset classes. They also come with different kinds of risks.
You can diversify your portfolio by asset class, as well as by other qualities such as industry, or by foreign or domestic markets. Learn more about portfolio diversification.
Why is choosing your asset mix important?
Holding a mix of asset classes can help you build a diversified portfolio. Diversification is an investing strategy that helps you manage exposure to risk. This is because different asset classes tend to perform differently under changing market conditions. For example, equities will fluctuate in value based on changes in the stock market. However, cash and cash equivalents will typically have a stable rate of return.
By holding a mix of investments from different asset classes you can create a diversified portfolio. Deciding how much of your portfolio to invest in each asset class is called asset allocation.
Your asset mix will largely determine the risk and expected return of your portfolio. To get the right mix for you, be sure that your asset mix matches your risk tolerance, financial goals and time horizon.
When should you review your asset mix?
As your financial goals and needs change, you will likely want to review — and possibly change — your asset mix. Here are a few examples of what this could look like.
- Blake, 21, is a university student and has just started investing – He is currently working part time while finishing his last year of full-time studies. He’s able to cover his living expenses using his student loans and some education savings from his parents. Blake has a small amount he can invest each month and has decided he’s comfortable taking on higher risk investments, as long as he doesn’t invest more than he can afford to lose. So far, his portfolio is small and split between crypto and ETFs.
- Ayesha, 28, has just started her first full-time job – She is able to invest a little each month now that she has a regular income. Luckily, she doesn’t have a lot of debt to pay off. She also has a long time horizon, with at least 30 years before she retires. She’s heard about crypto assets but has decided the potential volatility isn’t a good fit for her. As a result, Ayesha has decided to weight her asset mix towards a higher balance of equities, with smaller amounts of fixed-income and cash equivalents.
- Jeffrey, age 44, is established in his career and owns a home – He has been an investor for almost two decades and is also earning a comfortable income. He is a about 20 years away from retirement and keeps a moderate amount of his portfolio weighted towards equities, with fixed-income and cash equivalents taking up the rest. His mortgage on his home is nearly paid off, and he is about to buy a new home while keeping his current home as a rental property. This means Jeffrey’s rental home will generate income as an investment. His portfolio will now be balanced between equities, fixed-income, real estate, and cash equivalents.
- Susan, age 55, is hoping to retire a few years early – Hoping to retire at 60, she has already started to shift the balance of her portfolio away from equities and towards a higher proportion of fixed-income and cash equivalents. Susan still has some equity investments but knows that her time horizon before retirement is short and wants to start reducing her risk exposure. She meets with her advisor twice a year to review the current status of her portfolio.
- Luka, age 70, is living his retirement – He is focussed on living off of his investment income and keeping his portfolio stable. His goal is to be comfortable in retirement without outliving his savings. Luka also has a monthly pension that contributes to his income. His portfolio has a higher balance of fixed-income and cash equivalents, which offer more predictable rates of return. He continues to hold a smaller amount of equity investments in lower risk funds. He works with an advisor who helps him track the performance of his investment and make changes as needed.
These examples show what it could look like to adjust your investing asset mix over time. Everyone’s situation will look a little bit different, which is why it’s important to know what your investing goal is. Knowing what you’re investing for will also help you determine your time horizon — how long you need to invest to reach your goal.
It’s also important to know how much risk you can handle. This will be related to your time horizon, but it’s also a matter of your personal situation. Consider whether you could manage emotionally and financially if your investment had a sudden loss or drop in value.
For any investor, the right asset mix should:
- Provide the level of growth you need to meet your investing goals.
- Match your level of risk tolerance.
- Provide a balance of risk with your expected rate of return.
- Change as your needs and goals change over time.
One way to decide your asset mix is to identify whether you’re investing for growth, income, or both. Growth investing tends to be more oriented towards equity investments, while income investing tends to rely more on lower risk investments that pay regular interest or dividends.
What questions should you ask before buying a new investment?
Knowing what asset class an investment fits into is just one part of knowing to invest in. Before you buy any new investment, consider:
- How long are you planning to invest? Will you hold this investment for the short or long term?
- What are the risks of this investment, and are you comfortable with them?
- How does this investment fit or change your asset mix?
- How much do you realistically expect to earn on this investment?
- What are the costs of the investment? Consider any fees associated with buying, holding, or selling, as well as any taxes.
- Do you understand the investment well enough to explain it to someone else?
Deciding your preferred asset mix will help you when buying a new investment, when meeting with an advisor, or when deciding what changes to make to your investing portfolio.
The portfolio benchmark calculator can help you assess the performance of your investment portfolio, compared to common benchmarks.
Summary
Holding a mix of asset classes can help you build a diversified portfolio. It can also help you match your investing strategy to your goals.
- Having a mix of investments from different asset classes can help you build a diversified portfolio that mitigates risk.
- The three main asset classes are: equities, fixed-income investments, and cash or cash equivalents.
- Alternative asset classes include real estate and crypto assets.
- People typically need a different asset mix as they age, and as their investing goals change.
- Before you buy any new investment, be sure to consider how it fits into your investing goals and whether your comfortable taking on the level of risk.
