## The Secret to Asset Allocation: How Age, Risk Tolerance, and Market Environment Shape Your Portfolio

Many people think investing is complicated, but the core logic is simple—**don't put all your eggs in one basket**. That is the essence of a portfolio. But how exactly should you allocate? Many beginners are clueless. Today, we’ll break down the logic behind portfolio construction.

## What Exactly Is an Investment Portfolio?

**An Investment Portfolio refers to a combination of multiple financial assets held simultaneously by an investor in certain proportions**. These assets may include stocks, funds, bonds, bank deposits, and even cryptocurrencies.

Why do this? Imagine if you invest all your money in stocks—when the stock market crashes, your assets will sharply decline. But if you hold assets with different risk levels, like stocks, bonds, and bank deposits, when stocks fall, bonds and deposits might stay stable, balancing out the overall loss. **This is the value of a portfolio—diversifying assets to balance risk and return, protecting your financial health**.

Simply put, good financial health is like fitness—growth should be stable and sustainable, not volatile.

## The Three Key Factors That Determine How You Should Allocate Your Portfolio

However, each person’s portfolio allocation is different. Why? Because three critical factors are at play.

### Factor 1: How much risk can you tolerate?

**Risk preference is the most direct determinant**. Some people are naturally risk-loving, willing to exchange principal for higher returns; others are conservative, preferring stability over large fluctuations. These personal differences directly influence asset allocation.

Risk-tolerant investors tend to include more stocks and high-risk assets; risk-neutral investors seek balance; risk-averse investors prefer bonds and bank deposits for defense.

### Factor 2: How old are you now?

**Age is often more important than you think**. A 28-year-old working professional and a 65-year-old retiree face the same investment opportunities but should make very different choices.

Why? Because young people have time on their side. If your portfolio drops 30% at age 30, you still have 35 years of work ahead to earn and accumulate investment capital, and can recover when the market rebounds. But if you’re 65 and retired, your ability to earn is limited, and suffering large losses is too costly.

Therefore, young people can choose higher-risk portfolios to accelerate wealth growth; those approaching or already retired should shift to more conservative, low-risk allocations.

### Factor 3: What assets are you investing in? What is the market environment like?

This is often overlooked but crucial. **Different asset classes have vastly different risks, and even within the same asset class, risk varies with market conditions**.

For example, funds—money market funds and index funds—look similar but are very different in nature. Money market funds are highly liquid with low risk and returns; index funds have higher risk and potential returns but lower liquidity.

Looking at stock index funds, emerging market index funds and developed market index funds differ greatly in risk. Emerging markets are more susceptible to geopolitical and economic policy instability, with companies often concentrated in resource and energy sectors vulnerable to international shocks. Developed markets have more diversified industries and stronger risk resilience.

Data shows that from 2017-2020, emerging market ETFs and Eurozone ETFs had similar gains, but from 2020-2022, as market conditions worsened, emerging market ETFs declined by 15.5%, far more than Eurozone ETFs at 5.8%. This illustrates how environment impacts performance.

## Common Portfolio Allocation Strategies

After understanding these three factors, let’s look at the three most common portfolio configurations, designed based on investor risk preferences:

**Risk-loving investors** typically allocate: 50% stocks, 30% funds, 15% bonds, 5% bank deposits. This emphasizes growth and suits young investors seeking rapid wealth increase.

**Risk-neutral investors** tend to balance: 35% stocks, 35% funds, 25% bonds, 5% bank deposits. A “go forward, retreat if needed” approach.

**Risk-averse investors** prefer conservative allocations: 20% stocks, 40% funds, 35% bonds, 5% bank deposits. Focused on capital preservation and stable income.

If an investor has very high risk tolerance, they can allocate an additional $100–$200 into high-risk instruments like forex or cryptocurrencies, provided they can afford to lose that money.

Besides cross-asset allocation, you can also allocate within a single asset class. For example, if only investing in funds:

- Risk-loving: 60% stock funds, 30% bond funds, 10% commodities funds
- Risk-neutral: 40% stock funds, 40% bond funds, 20% commodities funds
- Risk-averse: 20% stock funds, 60% bond funds, 20% commodities funds

The core principle is: **Never adopt an “all in” strategy—don’t put all your eggs in one basket**.

## How Should Beginners Design Their Investment Portfolio?

With the theory in mind, let’s look at practical steps. Beginners need to go through three stages to design their portfolio.

### Step 1: Understand Yourself

First, clarify your risk tolerance. You can find online risk preference tests—answer a series of questions to assess whether you are risk-loving, risk-neutral, or risk-averse.

Once you know your risk profile, ask yourself: What are my investment goals?

**Wealth Growth**: Set specific targets, e.g., doubling your money in 5 years. Suitable for young risk-takers, because “fortune favors the brave.”

**Wealth Preservation**: Focus on capital preservation and beating inflation. Suitable for those satisfied with current wealth or already retired.

**Cash Flow Needs**: Prioritize liquidity for immediate access to cash. Suitable for entrepreneurs or those needing flexible funds.

### Step 2: Understand Investment Assets

Before allocating, get a basic understanding of the assets you choose. What are the risks, returns, and liquidity of stocks, funds, bonds, and bank deposits? Know these details.

### Step 3: Start Allocating

Here’s an example. Suppose Xiao A is 28 years old with 1 million NT$ to invest.

Xiao A is young, aggressive, with a risk preference leaning toward risk-loving. His goal is to double his money in 5 years. After selecting stocks, funds, and bank deposits, his allocation plan is:

**Stocks: 500,000 NT$** (50% of portfolio)
**Funds: 300,000 NT$** (30%)
**Bank deposits: 100,000 NT$** (10%)
**Emergency fund: 100,000 NT$** (for unexpected needs)

This way, Xiao A pursues high returns with 50% of funds, maintains moderate risk with 30%, and keeps 10% in safe assets plus 10% as emergency reserve.

Key point: **Always set aside an emergency fund to handle unexpected life events**. Otherwise, urgent needs might force you to sell assets at a loss.

After allocation, regularly review and adjust, since market conditions and personal situations change, and the original allocation may become unbalanced over time.

## Risks of Investment Portfolios: Not Just About Allocation

**A well-constructed portfolio reduces risk but cannot eliminate it**. Market volatility, economic crises, black swan events—all can cause losses.

Besides market risk, there are sector risks, inflation risk, interest rate risk, etc. More importantly, **the real risk often comes from the investor’s mindset and behavior**.

After setting up your portfolio, when markets suddenly decline, can you stay rational? Or will panic sell? When a certain asset skyrockets, can you resist the temptation to chase high? These decision-making skills often determine your ultimate investment success or failure.

### How to manage these risks?

**Set stop-loss and take-profit points**: Predefine target prices. Take profits when assets reach your goal; cut losses at preset levels to prevent major damage from market swings.

**Diversify across regions and industries**: Not just cross-asset, but also across geographies and sectors. This reduces the impact of a single market or industry downturn on your entire portfolio.

**Review and adjust regularly**: Based on market changes and personal circumstances, periodically evaluate your portfolio. If certain assets underperform or your situation changes, adjust accordingly.

**Stay calm**: Short-term volatility is normal. Don’t panic during dips. Stick to your long-term plan and trust in time’s power.

Ultimately, **building a resilient investment portfolio requires both knowledge and emotional discipline**. Knowing how to allocate is fundamental; maintaining rationality amid market fluctuations is what separates experts from amateurs.

## Frequently Asked Questions

**Q: I don’t have much money. Can I still build a portfolio?**
A: Absolutely. It depends on the minimum investment thresholds. Many funds and bonds have low entry points; in Taiwan, some funds require only NT$3,000 to start. As long as you meet the minimums, you can begin.

**Q: Will a well-allocated portfolio definitely make money?**
A: Not necessarily. A portfolio balances risk and return, but profitability depends on market conditions and asset performance. Continuous monitoring and periodic adjustments are necessary. Also, understand the investment prospects of your chosen assets beforehand.

**Q: How much do I need to learn before I can build a portfolio?**
A: You mainly need a basic understanding of your chosen assets—how they perform, when to buy or sell, and their risk-return profiles. Developing some analytical skills is enough.

**Q: Can I copy someone else’s portfolio?**
A: You can refer to it, but don’t copy blindly. Use similar proportions aligned with your own goals, or consult a professional financial advisor to tailor a plan suited to your situation.

**Q: After setting up my portfolio, can I just leave it alone?**
A: Absolutely not. Regular evaluation and adjustments are essential. Market environments change, and assets that performed well may suddenly underperform. Continuous management is key to long-term success.