Asset allocation represents how an investment portfolio is structured using stocks, bonds, and cash, and is one of the most important decisions every investor faces. It determines your portfolio’s risk and return potential more than any individual stock pick. In fact, over 90% of a portfolio’s long-term returns can be attributed to its asset allocation, rather than market timing or selecting specific securities.
This practical guide will help Canadian investors understand what asset allocation means, why it matters, and how to choose the right mix of investments for your situation. We’ll walk through the factors to consider, from risk tolerance to time horizon, and provide examples (with Canadian ETFs like VEQT, ZAG, and XAW) to illustrate how you can implement your chosen allocation.
By the end, you’ll have a clearer picture of how to build a balanced portfolio that suits your needs.
Asset allocation refers to how you split your investments across different categories of assets (such as equities, fixed income, cash and real assets). Think of your portfolio as a pie divided into slices: each slice is a different asset class, with its own level of risk and expected return.
For example, one slice might be Canadian equities, another slice International equities, and another slice Fixed Income. The way you size these slices defines your overall asset mix (Mastering Strategic Asset Allocation to Build Long-Term Wealth).
Dividing your investments among various asset classes helps you take advantage of the different strengths of each asset class while offering some protection from market volatility. In other words, a well-diversified asset allocation lets you benefit from growth assets like equities without having all your eggs in one basket. When one asset class is underperforming, such as stocks during a downturn, another class, like bonds or cash, can offer stability due to their negative correlation with stocks. This balance between growth and safety is the essence of asset allocation.
Key asset classes in a portfolio usually include:
By setting a target percentage for each class, you create an asset allocation that matches your investment objectives and comfort with risk. For example, a very simple allocation might be 60% stocks and 40% bonds (the classic "60/40" balanced portfolio). Another investor might choose 80% stocks / 20% bonds for higher growth, or 100% stocks if they have a high risk tolerance and long time horizon.
Asset allocation isn’t just an abstract concept, it has real consequences for long term investment outcomes. The mix of assets you hold will largely determine the volatility you experience and the returns you can expect. Stocks and bonds behave differently across market cycles, making your allocation to each a critical tool for managing risk.
At SciVest, we stand by the principle that you "Diversify to Minimize Risk".
There is no such thing as too much diversification!
How does this look over time?
Historically, broadly balanced portfolios have delivered smoother rides for investors than all-stock portfolios. For instance, over the 32-year period from 1993 to 2025, a 60% Canadian equity / 40% Canadian bond portfolio returned about 8.0% annually with much lower volatility (~10% standard deviation) than an all-equity portfolio. The 100% stock portfolio achieved only slightly higher returns (~9.88.8% annually) but with substantially greater ups and downs (~15.66% standard deviation) meaning bigger swings in value.
The graph below illustrates how adding bonds or other fixed income instruments can reduce risk significantly while only modestly lowering long-term returns.
A landmark study by Brinson, Hood, and Beebower (1986) found that a portfolio’s asset allocation explained over 90% of the variation in its returns. Specifically, it showed that asset allocation accounted for 93.6% of the quarterly return variations in 91 large U.S. pension funds from 1974–1983. This supports the idea that investors should focus on diversifying across asset classes to match their risk tolerance and goals, rather than obsessing over choosing the "best" stocks or bonds.
A well-chosen allocation also helps manage investor behaviour.
With a clear plan in place, you’re less likely to make emotional decisions like selling in a panic during market downturns. By staying diversified and sticking to a predetermined mix, you avoid the pitfalls of trying to time the market’s ups and downs. Discipline is easier when your portfolio risk is at a comfortable level.
Choosing your asset allocation is a highly personal decision. There is no one-size-fits-all answer, it depends on your unique circumstances. Here are the key factors Canadian investors should consider:
The key is to find an allocation that balances your risk tolerance with your risk capacity. Your investment choices should align with what feels manageable for you and what allows you to sleep at night.
Many advisors use questionnaires to help determine whether you are a Conservative, Balanced, or Growth investor.
Your asset allocation should reflect what you’re investing for and when you’ll need the money. Consider these aspects:
Finally, be honest about your knowledge level and the effort you’re willing to put into managing your portfolio.
A more complex asset allocation (including many asset classes or niche investments) might slightly boost returns or diversification, but only if you can maintain it. If you’re a beginner, there’s nothing wrong with keeping it simple, maybe just two or three funds. On the other hand, experienced investors might slice their allocation more finely (e.g. separating Canadian, U.S., International stocks, or adding real estate or gold for diversification).
The simplest approach for most people is to stick to broad asset classes.
While everyone’s exact allocation will vary, portfolios generally fall into a few classic categories along the spectrum from conservative to aggressive. Here’s a rundown of common model portfolios and who they might suit:
(The above are general guidelines. Each category can have variations. For instance, a “Balanced” investor might prefer 50/50 or 70/30. Always tailor to your own situation.)
Setting an asset allocation is not a one-and-done task, you’ll need to maintain that allocation over time. As markets move, your portfolio’s mix will drift.
For example, if stocks have a great year, a 60/40 portfolio might end up looking like 65/35 because equities grew and now form a larger percentage. To get back to your intended 60/40 mix, you rebalance by selling some stocks or adding more to bonds. Similarly, if stocks drop significantly, you might add to stocks to get back up to your target weight.
Rebalancing is important to keep your risk level in check. Without it, a portfolio can become too aggressive or too conservative unintentionally. A disciplined rebalancing strategy forces you to “buy low, sell high”, trimming positions that have done well and topping up those that have lagged, which can enhance long-term returns and control risk. By doing so, you continuously realign your portfolio with your risk profile and goals, rather than letting the market drive your allocation.
Determining your asset allocation is a foundational step in your investment journey. It aligns your portfolio with your comfort level, your aspirations, and the realities of the market. There is no absolutely “perfect” asset allocation, every choice involves trade-offs between risk and return. The key is finding a mix you can commit to for the long run.
Remember that your asset allocation can evolve as your life circumstances change. Major life events such as marriage, home purchase, children, nearing retirement or other material shifts in financial situation warrant revisiting your mix. Many investors gradually move to a more conservative allocation as they age to protect accumulated wealth. Just make sure any changes are driven by strategic reasons, and not simply a reaction to short term market noise.
If you’re unsure where to start, consider seeking contacting us to discuss your specific situation. The important thing is to get started with a plan. Even a rough plan is better than none, because it gives you a framework to guide investment decisions. Take the time to define your mix, implement it wisely, and rebalance periodically. With these steps, you’ll be well on your way to a resilient portfolio tailored to your financial future.
Happy investing!