Portfolio Allocation Percentage

The Herfindahl–Hirschman index is the sum of the squared weights. Squaring means a 50% position contributes 0.25 to the index while a 5% position contributes only 0.0025 — a hundredfold difference in influence, even though the weights differ only tenfold. That is exactly what you want: concentration risk is dominated by the large positions. Counting holdings treats a portfolio with one 90% position and nine 1% positions as having ten holdings, which is misleading. HHI correctly identifies it as nearly a single-asset portfolio. The effective number of holdings, 1/HHI, restates the index on a count-like scale, so a portfolio with HHI = 0.2988 behaves roughly like one holding 3.35 equally weighted assets.

Two approaches dominate. Calendar rebalancing fixes a schedule — quarterly, semi-annually or annually — and trades back to target on those dates regardless of how far the portfolio has drifted. Threshold rebalancing monitors the drift and trades only when a position moves more than a set band, typically 5 percentage points, from its target. Most evidence suggests the two produce similar long-run results, and that rebalancing more often than annually adds trading costs and tax drag without reliably improving returns. The important thing is to have a rule and follow it: ad hoc rebalancing tends to become selling winners after they have already run and buying losers before they have finished falling. In taxable accounts, prioritise rebalancing with new contributions and dividends before selling anything.

For the allocation itself, only the percentages matter. A portfolio of $10,000 split 60/40 and a portfolio of $10,000,000 split 60/40 have identical weights, identical expected returns in percentage terms, and identical risk. The absolute values matter for two things only: the size of the trades required to rebalance, and practical constraints like minimum purchase sizes, transaction costs and the fact that a 1% position in a $5,000 portfolio is a $50 holding that may not be worth the commission. This is why very small portfolios often benefit from holding fewer positions — the diversification benefit of the tenth holding is real but smaller than the cost of acquiring it.

There is no universally correct answer, because the right allocation depends on your time horizon, your tolerance for drawdowns, your need for liquidity, and your other assets such as a house or a pension. The broad principles are well established: a longer horizon supports a higher equity weight, because equities are volatile over short periods but have historically outperformed over decades; a nearer need for the money argues for bonds and cash; and a portfolio you cannot hold through a 40% drawdown without selling is too aggressive regardless of what a questionnaire says. The model templates on this page — conservative income, 60/40, three-fund, all-weather, aggressive growth — cover the range most individual investors fall into, and the calculator lets you test any of them against your current holdings.

It depends on what question you are answering. For retirement planning, many advisers include the expected value of a pension and sometimes the equity in a home in a total net-worth picture, because both reduce the need for other assets to fund later life. For day-to-day investment decisions, it is usually clearer to keep them separate: a house is illiquid, undiversified and consumed rather than spent, and an emergency fund exists precisely so that it is not invested. A practical compromise is to build your investment allocation from the liquid, investable assets only, and then note the pension and property alongside as context. If you include them, be consistent about it, because mixing the two approaches produces misleading weights.

Because each holding grows at a different rate. If equities return 20% in a year and bonds return 2%, the equity portion of a 60/40 portfolio grows faster and its weight rises — from 60% to roughly 64% after a single year of that divergence. Nothing was bought or sold; the market did the rebalancing in the wrong direction. This is why drift is inevitable in any multi-asset portfolio and why rebalancing exists as a discipline rather than as a response to a problem. Over long periods the drift can be substantial: a portfolio left untouched for a decade of strong equity returns can end up with an equity weight far above its target, and a correspondingly higher risk profile than the owner ever intended.

Four techniques, in rough order of preference. First, direct new contributions to the underweight asset rather than selling anything — this fixes drift at zero cost. Second, reinvest dividends and distributions into the underweight position instead of taking them in cash. Third, do your selling inside tax-advantaged accounts (a 401(k), IRA, ISA or SIPP) where capital gains are not triggered, and hold your most tax-inefficient assets there. Fourth, if you must sell in a taxable account, use specific-lot identification to sell the highest-cost lots first, minimising the realised gain. Many investors find that contributions and dividends alone are enough to keep a portfolio within a 5% drift band for years, particularly during the accumulation phase when contributions are large relative to the portfolio.