Photo of someone cooking to illustrate that you need to "cook up" a plan for asset allocation.

Cook up your asset allocation plan

Good food is all about finding the best ingredients, combining them in the right proportions for the perfect mix of flavors, and cooking for the proper amount of time.

Your investment portfolio has some of the same characteristics. But, the ingredients for an investment portfolio are called asset classes. How you combine them is called asset allocation.

The way you mix your investment options can have a big impact on reaching your financial goals. You don’t need to know all the ins and outs right away, but it is important to get comfortable with asset allocation to feel more confident in your choices—or the choices a financial professional helps you make. Here are some steps to help find a good mix of investments for you and maintaining that asset allocation over time.

Get familiar with your ingredients.

Investors generally have 3 important asset classes to understand: cash, fixed income, and equities. Each offers a different mix of risk and return. That gives each asset class a specific way to fit into an overall asset allocation.


Cash and cash equivalents are typically the least risky assets in an investment portfolio. Their prices usually don’t move around a lot. But they offer the lowest potential return. These are investments like money market funds and certificates of deposit. These investment options may experience price fluctuations and may lose value.

Fixed income

Bonds are the most common type of fixed income, an investment that can generally provide income at regular, predictable intervals. Fixed income is normally known for being lower risk—just not as low as cash. With returns typically higher than cash, fixed income can make a good base for your asset allocation. These investment options may experience price fluctuations and may lose value.


Equities, or stocks, can be like the growth engine of an investment portfolio. The return over time tends to come from increases in the price of a stock. Because that sort of growth can be uncertain, stocks carry more risk than the other two asset classes. But they also have the potential for a higher return. These investment options may experience price fluctuations and may lose value.

Those are the 3 basics. There are some varieties for each. For example, within equities, you can find variations based on location (emerging market equities or European equities) or by company size, often called market capitalization (small-cap, mid-cap, and large-cap). Each variety brings slightly different levels of return and riskiness.

Mix it up.

Asset allocation is a way you can help your assets grow more consistently over time. It uses the benefit of diversification—that’s the idea that asset classes don’t move in sync, so one or more may grow while others decline. In some challenging years, one asset class could simply go down less than the others. The end goal is to have longer, more consistent growth by investing in a variety of asset classes.

So, how to determine what mix is right for you? It’s typically based on how much time you have until you may need these assets and your comfort with how the money will fluctuate over that time.

Know how much time you have.

Why is time so important? Investing requires time for assets to grow. Knowing how much time you have to reach your goal can also help define how you invest and which asset classes you use. If you’re in your 20s and investing for retirement, you may have 30 or 40 years to reach your goal. If you’re 60, you may have less than a decade before you need that money.

Because equities can be volatile, they could swing from one extreme to another. Maybe they go up 20% one year and down 10% another. If you have more time until you need the money, the risk of losing some of your value in 1 or 2 years (out of 30 or 40) could be a risk worth taking.

Typically, people with more time hold higher proportions of equities to capture that potential growth. As the investment goal gets closer, it’s common to allocate more to fixed income to minimize your risk of losing the growth you’ve had over the earlier years.

Graphic showing different stock, bonds, and cash asset allocations based upon if someone is just starting out investing or is ready to retire.

For illustrative purposes only.

Understand your appetites and preferences. 

How you approach your mix of investments is personal. Some people are comfortable knowing they could lose money in the short run if there’s a possibility for big gains in the long run. Others are more conservative, preferring to take less risk with the money. Your level of comfort with market volatility is your risk tolerance.

Risk tolerance is framed by your natural preferences and the time to reach your investment goal. Though you may be comfortable with risk, if you need the money in just a few months, it’s generally better to be more conservative and not put too much of your money at risk of losing value.

Use a recipe, adjust to taste.

When it comes to asset allocation, you could create a simple investment plan to serve as a recipe. To create a basic investment plan, just set down a lot of the factors we’ve discussed:

  • your goal
  • the asset classes you’ll be using
  • the amount of time you’ve got
  • your appetite for risk
  • your target asset allocation

Write down your plan or put it in a spreadsheet, so you don’t forget over time. Refer to your investment plan so you’re still on track.

Want some help? Consider working with a financial professionalrobo-advisor, or other asset manager to help build an investment mix.

Stir occasionally to prevent sticking.

Tastes can change over time. So can your investment goals and preferences. Checking in with your investment portfolio can help make sure that you’re on track to meet your goals. You may need to stir the mix or add new ingredients—that’s called rebalancing.

As your assets grow or shrink, your allocation can move away from your target. Rebalancing is the way you bring your asset allocation back into its proper alignment for your comfort with risk and time.

Let’s say you started the year with 70% of your portfolio invested in equities. If those equity investments do a lot better than the rest of the portfolio, maybe that growth made equities 80% of the total now. To rebalance to your original allocation, you might transfer some equities and reallocate the money into your other asset class choices to get the mix back to your target.

Plan on checking in at least once a year. (Or if you have a major life event, lift the lid and see if you need to make an adjustment.)

Be careful, though. Checking too frequently could get you into a short-term mindset. Investing is a long-term prospect. There’s a chance that daily or weekly peeks could cause you to move assets too often, increasing your costs and hampering your portfolio’s chances of growing.

Don’t be too quick to toss it out.

Investing has its ups and downs in the form of market volatility. Severe market drops can be scary, but panicking can lead to bad decisions. Try to avoid knee-jerk reactions when adjusting your asset allocation. Refer to your target allocation and remember your investment plan.

Make it easier.

Not everyone has time to do investment research and pick a bunch of stocks and bonds. That’s why investments like mutual funds and exchange-traded funds (ETFs) exist. These types of investments have a professional manager who researches, selects, and combines the ingredients for you.

Some funds even take care of the asset allocation. With a target date fund, you pick one that has a year close to when you’ll retire. The portfolio manager selects all the investments, and, over time, adjusts the asset allocation as that date approaches.

With a target risk fund, you pick the fund that best matches your risk tolerance, from “conservative” to “aggressive.” The portfolio manager then selects investments that match that level of risk.

And if you’re not sure of your goals, your risk tolerance, or how much time you need to reach your goals, that’s OK. You can reach out to a financial professional. Think of them as a personal meal planner for your portfolio. They can help you discover your goals and suggest assets and asset allocation to get you there.

What to do next?

  • Have a retirement account from your employer with service at Principal®? Log in to to check in on your asset allocation and see if you’re still on track. First time logging in? Get started here.
  • What’s your risk appetite? Log in and take our quick quiz.  
  • Got a financial professional? They can help you figure out your personalized asset allocation plan. If you’d like to meet with one face to face, we’ll help you find one or you can see if a robo-advisor may be a good fit for you. 

The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, investment advice or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.

Investing involves risk, including possible loss of principal.

Asset allocation and diversification does not ensure a profit or protect against a loss. Equity investment options involve greater risk, including heightened volatility, than fixed-income investment options. Fixed-income investments are subject to interest rate risk; as interest rates rise their value will decline. International and global investing involves greater risks such as currency fluctuations, political/social instability and differing accounting standards. These risks are magnified in emerging markets.

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