Do-It-Yourself Asset Allocation

1. Choose a portfolio recipe

A portfolio recipe is the list of ingredients that make up your asset allocation portfolio. Some recipes are strategic (i.e., fixed or static) and the ingredients do not change over time. Other recipes are tactical (i.e., dynamic, active) and the ingredients need to be changed over time. For "do-it-yourselfers" there are three primary ways to find a recipe for building an asset allocation portfolio.

• Portfolio Recipe Publishers. Several newsletters, books, blogs, and web sites offer detailed instructions for building an asset allocation portfolio using low-cost exchange-traded funds (ETFs) or mutual funds. Some of these recipes are provided for free, and others require the purchase of a subscription or book.
• All-in-One Fund. These are mutual funds or exchange-traded funds from companies like Vanguard, Pimco, or Blackrock (iShares). Each of these "all-in-one" funds include several types of assets, forming a "complete meal." So you only need to buy one thing to build your asset allocation portfolio. This is similar to buying pre-prepared dishes at a grocery store... you just need to warm and eat. It's much simpler to choose an all-in-one fund, but you have a smaller selection of recipes to choose from.
• Create Your Own. You can create your own portfolio allocation by choosing your own asset class funds. This is a more advanced method since you are creating your own recipe from scratch. But if you are familiar with the ingredients (i.e., the asset classes) and how they taste when combined (i.e., correlations and risks) and how to combine them (i.e., the allocations) and how to adjust the proportions when needed (i.e., dynamic rebalancing) and the season (i.e., economic forces) then you may wish to explore this option. Useful tools include data sources and portfolio tracking sites.

2. Buy the underlying investments

After you have selected your recipe, you will need to shop for the ingredients. Depending on the recipe, these are usually exchange-traded funds or mutual funds. You can buy these at a discount brokerage firm.

3. Rebalance your portfolio

Once you have purchased the funds needed, you will need to periodically rebalance to insure that you continue to follow the recipe. 

For a strategic (static) recipe, an annual or quarterly rebalance is normal to restore the original percentage allocations.

For a tactical (dynamic) recipe, you will need to make more frequent updates. Many recipes use monthly or quarterly updates. Some use bi-weekly or weekly updates. For bi-weekly or weekly updates, consider the time and trading costs before you begin. Any recipe requiring updates more frequently than weekly is really a short-term trading algorithm and not an asset allocation recipe.

Other options

In contrast to the do-it-yourself approach, another option is to hire a financial advisor, broker, or an automated online adviser to create a portfolio for you. This is like hiring a personal chef who finds or invents a recipe to meet your specific preferences and needs.