Asset Allocation Calculator

Asset Allocation Calculator

Asset Allocation Calculator will be used by an individual to allocate their funds or investment in the different asset classed depending upon their age, risk profile, life goals, etc.

Asset Allocation Calculator

100 – A


Wherein,
  • A is the age of the individual.
is the age of the individual.
$

About Asset Allocation Calculator

The formula for Calculating Asset Allocation is per below:

Asset Allocation for Stock = 100 – A

Wherein,

A is the age of the individual.

Note: The rest of the portion will be either invested in bonds or cash, which are less risky when compared to stock.

Asset allocation is not an easy task, and there is no one method to determine the same, and it varies from case to case and individual to individual. This involves considering factors such as age, risk profile, life goals, current debt, etc. and all these factors affect a lot of asset allocation decisions as the portfolio manager would be handling those funds and would change asset allocation accordingly. They have an Investment Policy Statement commonly called IPS, which shall have a pre-determined rate of returnRate Of ReturnRate of Return (ROR) refers to the expected return on investment (gain or loss) & it is expressed as a percentage. You can calculate this by, ROR = {(Current Investment Value – Original Investment Value)/Original Investment Value} * 100read more required on the portfolio, and allocation will be determined accordingly and keeps on changing if there is a change in any of the important factors.

However, since these involve a lot of complications and calculations, we shall focus on simple formula (a thumb rule ) wherein we shall subtract an age from 100 to determine the allocation to be made in stock, which is considered as risky assets. The remaining percentage can be allocated to less risky assets or even can be kept in cash. For simplicity, we shall consider three asset class – stock as a risky asset, bonds as a less risky asset, and thirdly, cash equivalents treated as the least risky when compared with the other two.

How to Calculate Using Asset Allocation Calculator?

One needs to follow the below steps in order to calculate the Asset Allocation.

Step #1 – Determine the risk profile of the individual, goal of the investment, number of years for which investment is to be made.

Step #2 – Age is the most important factor here, which should be noted down.

Step #3 – Determine the ranges within which the investment would be allowed for risky assets per factor determined in step 1.

Step #4 – Now subtract the age that was noted down in step 2 from 100, which shall be the asset allocation towards a risky assets, which is equity.

Step #5 – The remaining percentage can be equally allocated to bond and cash or per individual requirement, either the entire remaining percentage in cash or in bond.

Step #6 – The resultant is rough allocations per rule of thumb, although not the accurate ones.

You can download this Asset Allocation Calculator Excel Template here – Asset Allocation Calculator Excel Template

Example #1

Mr. Vinay is an individual who is staying single, and he ages 35 years old. He has never been into investment and doesn’t understand much about it. He is very nicely settled in his own house and doesn’t owe any liability. The only goal he has is now to have enough funds for himself during retirement, which is 30 years away from now.

He approaches a financial advisor who acknowledges his factors and considers his concerns and investment goal and provides him with an IPS statement which he barely understood, and hence as the last option, recommends him to use the rule of thumb approach, which would be easy for him to understand and on an average the allocation will come close per Mr. Vinay’s requirement.

Further, Mr. Vinay chooses to allocate cash and bond as well.

Based on the above information, you are required to calculate Asset Allocation per rule of thumb approach.

Solution:

We can note here that Mr. Vinay is well settled, and there is no debt obligation for him and the only goal of his life to have funds during his retirement, and therefore the risk appetiteThe Risk AppetiteRisk appetite refers to the amount, rate, or percentage of risk that an individual or organization (as determined by the Board of Directors or management) is willing to accept in exchange for its plan, objectives, and innovation.read more would be to allocate lesser funds in risky assets and more funds in the less risky asset.

Now we can use the below formula to calculate the Asset Allocation:

Asset Allocation = 100 – A
Asset Allocation Example 1
  • = 100 – 35
  • = 65%

Per the above rule of thumb formula, the allocation toward risky assets should be 65% as the time frame to invest in 30 years, and the remaining portion, which is 100 – 65, which is 35%, can be invested in cash equivalents and bonds.

However, since we aren’t given any specific allocation, we can split them in equal ratios, which are 35% / 2, which is 17.5% in cash equivalentsCash EquivalentsCash equivalents are highly liquid investments with a maturity period of three months or less that are available with no restrictions to be used for immediate need or use. These are short-term investments that are easy to sell in the public market..read more and 17.5% in bonds.

Asset Allocation Example 1-1

Example #2

Mr. Kapoor, who is 55 years old, has been investing in the market for quite some time but has been suffering losses, and hence he decided to reduce the asset allocation to risky assets. Since his portfolio is down, he is unsure of what has to be done further. He just wants to receive fixed income per month and a lumpsum amount at the end of 15 years. He doesn’t have any debt outstanding. He takes advice from his friend, who is MBA in finance and because of his long-term investment, age factor, and limited knowledge on asset allocationAsset AllocationAsset Allocation is the process of investing your money in various asset classes such as debt, equity, mutual funds, and real estate, depending on your return expectations and risk tolerance. This makes it easier to achieve your long-term financial goals.read more, suggest he use a rule of thumb method for his asset allocation. Mr. Kapoor is not interested in holding any asset in cash.

Based on the given information, you are required to calculate the Asset Allocation percentage both in stocks and bonds per suggested method.

Solution:

We can note here that Mr. Kapoor is well settled, and there is no debt obligation for him and the only goal of his life to have funds during his retirement, and therefore the risk appetite would be to allocate lesser funds in risky assets and more funds in the less risky asset.

Now we can use the below formula to calculate the Asset Allocation:

Asset Allocation = 100 – A
Asset Allocation Example 2
  • = 100 – 55
  • = 45%

Per the above rule of thumb formula, the allocation toward risky asset should be 45% as the time frame to invest in 15 years, and he is disinterested to increase the allocation towards risky asset and the remaining portion which is 100 – 45 which is 55% can be invested in bonds and which shall meet his requirement of earning fixed incomeFixed IncomeFixed Income refers to those investments that pay fixed interests and dividends to the investors until maturity. Government and corporate bonds are examples of fixed income investments.read more.

Example 2-1

Conclusion

Asset allocation is not easy and depends upon case to case and type of individual; their risk factors, time horizon, liquidity requirements, tax requirements, legal requirements, etc. are some of the factors that derive asset allocation. Since many of the individuals lack knowledge of the capital marketsCapital MarketsA capital market is a place where buyers and sellers interact and trade financial securities such as debentures, stocks, debt instruments, bonds, and derivative instruments such as futures, options, swaps, and exchange-traded funds (ETFs). There are two kinds of markets: primary markets and secondary markets.read more, this rule of thumb method would be useful for them.

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