Folks,

In an asset portfolio, most of the return are determined by the stock versus bond ratio.  So, for the first step of asset allocation is to determine the stock versus bond ratio.

This has to be decided by each individual.  The followings are some of the guideline

A) The stock/bond ratio should be between 80/20 to 20/80.  If you go above and below that ratio, you are talking too much or too little risk and do not get the optimal return.

B) Risk versus Return tradeoff. 
   
    1) If you take on higher percentage of stock allocation, your portfolio will be more volatile.  You need to take the "50% test".  Historically, stock can drop 50% of its value at any point of time.  Can you stop yourself from selling when that happen??

    2) Do you NEED to take risk?? If you have ENOUGH money, you do not need to take on higher percentage of stock allocation.

C) Age in bond rule -> A simple rule is to take you age and use that as your bond ratio.

D) All else fail, do a 60/40 asset allocation.  Those are the standard ratio use by insurance company for their investment.

E) When in doubt, lower the stock ratio.  The strategy only work if you can yourself from selling in a market crash.  If you cannot sleep at night with your aset allocation, reduce you stock exposure...

F) Emergency fund is not part of your asset allocation.  You need at least 3 to 6 months of emergency fund.  You may keep longer if you feel your income is unstable.

Dreamer