How does risk tolerance affect asset allocation?

Risk tolerance influences asset allocation by determining the proportion of aggressive and conservative investments you have. On a very simple level, this means what percentage of stocks versus bonds and cash you hold.

Why is asset allocation important?

Given the importance of asset allocation, investors must find the right mix that aligns with their risk tolerance and investing time horizon. As an example, let's take a look at two hypothetical investors. One is single, 25 years old, does not have kids, and has a stable career. The other is a married, recently retired 65-year-old.

How do I find a suitable asset allocation?

There are tools that allow you to obtain a suitable asset allocation in one fell swoop. Some investors follow the Rule of 100 to determine an asset allocation. This rule of thumb suggests subtracting your age from 100 to determine the level of stock exposure within your portfolio.