Asset allocation is 98% of portfolio construction. Its clear that asset allocation is king in this game, and should be the primary focus of the conversation.

The question becomes, how to determine what asset allocation is most appropriate? I see the question in 2 parts. First is how much risk you are willing to take in this portfolio, that will help to answer your mix between stocks and bonds. Stocks in general are usually the more aggressive asset class… and next is deciding the specific weights of each asset class you are going to hold. Here is an important point. We know AA is the most important factor, and you probably want at least some exposure to each type of stocks. These would be cap sizes, geography, and sector. The easiest solution is with something like a total stock market index fund and you just take whatever mix of stock classes that gives you. My opinion is that, that is rarely going to be the optimal mix of stocks.
But I have a full video about this, and I expect to make more in the future so subscribe to the channel so you don’t miss any of those.
Back to our question on asset allocation, Most asset allocation calculators online only give a very basic breakdown. I can’t share what my firm recommends for say a moderate aggressive investor over YouTube. So if you want to make your own decisions on how to allocate the portion of your portfolio that will go towards stocks, you will simply need to put in the work on your own which can require a pretty significant amount of time and information to do correctly. Deciding these weights is going to include some return projections, which is never a perfect science. I would recommend you research historical risk and return information for each asset class of stocks, then pick a mix that is going to diversify away at the very least the portfolios systematic risk, but maintain a high enough projected return. At least Consider large mid and small US stocks of all styles (styles meaning growth and value), international developed and international emerging of all styles, high yield bonds, govt bonds, corporate bonds, and cash.
But once you have decided on the asset allocation to hold, the hard work is behind you. Risk and return projections become much more accurate, since much of the security and sector risk should have been diversified away. You can test how tweaks to this mix could affect its behavior, review a rebalancing strategy, and share it with others to get some outside opinions.
The second, but much less significant decision is if you will be using active or passive investments. 91% of active managers underperform after you account for their management fees, so like Warren buffet says passive investments are the safer bet. But its also true that active can sometimes outperform. In the models I help run at the firm that I work, we have averaged about 80 bps in performance per year for the last 3 and 5 years just by manager selection in the active funds that we do use. If you are using active management, you will need to select the funds and managers you want to invest with. Remember that 91% underperform, so you need to find that top 10% or don’t waste your time