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Choosing Your Asset Allocation When Investing in the Stock Market

  • 2 days ago
  • 8 min read

When it comes to investing in the stock market, many physicians in our online communities for doctors prefer to keep it simple, investing in a basic three fund portfolio of index funds, or similar. However, even when this is the plan, you have to choose how to allocate that money between stocks and bonds, as well as how much to keep in cash or other investments. Below, we’ll cover some general rules of thumb for how to decide your asset allocation based on your age, risk tolerance, and goals. 


As always, do your own due diligence or talk to a financial advisor familiar with physicians about your specific situation prior to making any decisions based on this article.


Disclosure/Disclaimer: Our content is for generalized educational purposes.  While we try to ensure it is accurate and updated, we cannot guarantee it. We are not formal financial, legal, or tax professionals and do not provide individualized advice specific to your situation. You should consult these as appropriate and/or do your own due diligence before making decisions based on this page. To learn more, visit our disclaimers and disclosures.


5 factors that determine your asset allocation strategy and percentages


What is asset allocation?


Asset allocation just means where you choose to put your money. You’ll have to divide your investments into stocks, bonds, cash, and if applicable, other investments like real estate, commodities, or other alternative investments. 



In general, you’ll want a balance of these so that you play to the strengths of each category of investments, with some optimizing for fast growth, others optimizing for stability and steady growth, and others optimizing for immediate accessibility. 



What is the goal of choosing an asset allocation?


It’s important to think about the 30,000 foot view when deciding what to invest in. The goal is to balance the returns that you get with the risk that you’re willing to take (remember, all investments come with some degree of risk). How much of your investment portfolio is in each asset class will be one of the biggest factors affecting the long term growth of your overall portfolio.


Remember - higher risk leads to higher rewards - but also higher loss potential. Too much in the high risk category will expose you to a lot of volatility, whereas too much in the safe categories will prevent your ability to compound your wealth.



What should I know about each asset class prior to picking an asset allocation?


Different assets tend to behave differently, have different risks and upside potential, and have different tax implications. Therefore, your asset allocation at any given time should reflect your stage of life and goals at that time. 



Stocks


Of things you can invest in through your investment portfolio or retirement accounts (not including alternative assets such as cryptocurrency, physical real estate, or similar), stocks generally have the highest long term growth potential. That’s why when you are young, many physicians tend to put a high percentage of their investable assets into stocks. 


However, stocks are more volatile, especially if investing in individual stocks. That said, even stocks you’re investing in through index funds can fall sharply during market crashes.


When you have a long investment horizon and don’t need to access that money, you can weather that volatility, as historically, the market will recover. However, as you inch closer to retirement or if you have something that you’re saving for where you’ll need to be able to liquidate the value, you may want to decrease your exposure to the volatility that comes with having stocks. This is because if you have to sell those stocks when they’re down, you’ll take a large loss.



Bonds


Bonds are much less volatile than stocks, but along with that, their returns tend to be lower over time. People generally use bonds to reduce portfolio swings.



Cash


Cash is the most stable of all your assets, but that doesn’t mean you should keep all of your money in cash. Cash has very little growth potential - in fact, it can lose spending power to inflation. Even if kept in a savings account or a high yield savings account, the amount generated from interest may not keep up with inflation, and furthermore, gains will be taxed at ordinary income tax rates. While having money in cash is helpful for your day to day needs and your emergency fund, unless you’re saving up for something, it generally doesn’t make sense to have a huge part of your portfolio in cash when it could be compounding in growth via stocks and bonds.



What factors into your asset allocation decision amongst stocks, bonds, cash, and other investments?


This should depend mainly on the factors below. The ultimate asset allocation you decide on will balance the answers to these questions.



How old are you?


Generally speaking, when you’re younger, your portfolio will skew towards stocks. As you grow older, you’ll start shifting a higher percentage of your portfolio towards bonds.



How long until you need to access the money (i.e. what’s your time horizon for investing)?


Long term horizon of 15+ years: If you won’t need to access the money for a long time, you can afford to hold more in stocks because you’ll be able to weather short term downturns in the market and recover from them. In your 20s and 30s for example, many have 80-100% of their portfolio in stocks, assuming that they don’t need access to that money for a while. 


Medium term horizon of 5-15 years: Here you’ll want a balance of long term growth and stability, as you don’t want your entire portfolio to take a dramatic dip if there’s a downturn in the economy. This could look like 60-80% stocks and 20-40% bonds.


Short term horizon of <5 years: As you get close to retirement, your portfolio will swing towards bonds (unless you have so much incoming cash flow from other investments or enough money in your portfolio that a downswing wouldn’t hurt you). In these cases, you could have as little as 20% in stocks (or even less depending on how conservative you are). Importantly, if you’re saving for something - such as a down payment on a house or a practice buy in, you don’t want that money in stocks. You’ll want to consider putting that money into shorter term investments or keeping the money in cash in a high yield savings account or similar.  



What’s your risk tolerance, and how stressed will you be if there’s a substantial dip in your net worth?


This is a very important question to ask yourself, and to be honest with yourself about. Two people at the exact same age and with the same retirement timeline may still need different asset allocations because of their ability to stomach risk and weather the storm. This is a psychological question, as it factors in:


  • Will you be able to sleep at night if your portfolio falls by 30%?

  • Will you panic sell if there’s a huge dip (this is generally a mistake, as you lock in losses)?

  • Will you change how you live if your portfolio takes a big dip?


If your answer to these questions indicates that you would be very stressed with large swings, you may lean towards bonds and cash over stocks, even if the typical financial advice for your age would be more stocks.



What is your actual risk capacity financially?


This is a different question than the last question, as it’s not how you would feel about a dip, but rather whether you can actually tolerate a financial loss. As a physician, if you are young, you likely have a large capacity for risk from a pure financial standpoint. If you take a financial loss, you can likely earn enough money in the future to be able to afford a comfortable retirement as you have a stable and high income. This is different from a person with a lower net worth in their 60s who’s about to retire. 



What are your financial goals?


If your goal is to make as much money as possible and you’re willing (and able) to weather the financial risks, you’ll skew heavier towards stocks, as they offer the most long term growth potential. If you have a retirement number that you’ve already achieved and you just want slow and steady growth, but don’t want to have the risk of having to earn more money if there’s a loss, you may skew towards bonds or cash.


The TLDR here is that you’ll want to balance the potential upside of gains with the downsides of losses. If you can achieve your retirement goals with a small to moderate amount of risk, you’ll have to ask yourself whether making 15% more by taking on more risk is worth the stress that would be generated by a potential 30% downside, for example.



Where can I get help figuring out the answers to these questions?


If you’re not completely sure how to answer these questions or need some help navigating decisions, it may be a good idea to use a financial advisor to help you put together a financial plan.


Related PSG resource:



What is a general rule of thumb for asset allocation by age?


A general rule of thumb that’s often cited is that your bond percentage should roughly equal your age.



Does this apply to doctors?


It can, but also keep in mind that as physicians, your earning potential is so high that you may be able to take more risk than the general population and still have a comfortable retirement if there’s a dip in your portfolio. If you know that your net worth is going to far exceed what you ‘need’ to have a comfortable lifestyle, you may choose to be more aggressive with your investment accounts. Or you may choose to set aside one pot of money that’s more conservative that would cover your needs, and then be more aggressive with the rest.



What are some examples of asset allocations by investor type? 


Aggressive growth


80-90% stocks, 10-20% bonds


This may be good for young physicians with a long time horizon before needing the money and a high tolerance for volatility.



Balanced growth


60-70% stocks and 30-40% bonds


This may be good for physicians who want a slow and steady pathway to a normal retirement age.



Conservative growth


40% stocks and 60% bonds and cash


This may be good for those that are nearing retirement, who have near term spending needs, or who have an extremely low risk tolerance.



Managing your asset allocation overtime and rebalancing your portfolio’s asset allocation


Over time, you’ll see that your asset allocation will shift naturally, as your stocks will typically grow more rapidly than the money that you have invested in bonds, making the percentage of your portfolio in stocks higher. Most financial advisors will recommend that you occasionally rebalance your portfolio to get you back to that initial asset allocation. You should consider doing this 1-2x a year or when there are huge swings in your portfolio, and can do this by either:


  • Investing new money into the part of your portfolio that has decreased in percentage from your desired allocation

  • Selling some stocks and bonds and investing that money into the part of your portfolio that needs bolstering. You’ll want to make sure that you’re aware of the tax consequences of doing this if you’re using your taxable accounts to rebalance.



Conclusion


Choosing an asset allocation is one of the first things you’ll have to decide when you start investing, as you want to make sure that you’ll get to where you want to be in a way that you’re comfortable with both emotionally and financially. Once you’ve chosen an asset allocation, it’s important to update that asset allocation as your life changes, and rebalance your portfolio accordingly. If you need help with these things, consider using a financial advisor for physicians to help you navigate your investing decisions in accordance with your financial plan and goals.



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