Calculating Your Asset Allocation

published 17 February 2008

I own Dodge & Cox Balanced, T. Rowe Price Capital Appreciation and Vanguard Star mutual funds, as well as five pure stock funds and one bond fund. When I calculate the percentage of my investments in stocks and bonds, should I include the portion of bonds in my balanced funds as part of my total allocation?

Absolutely. Think of it this way: If you have $1,000 in a pure stock fund and $1,000 in a fund that's 60% in stocks and 40% in bonds, you effectively have $1,600 in stocks and $400, or 20% of your portfolio, in bonds.

The quick way to calculate your bond allocation: For each fund, multiply the percentage that the fund represents in your portfolio by the percentage of the fund that's invested in bonds. Then add those totals together.

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However, holding balanced funds mucks up the math. Another problem with balanced funds is that many investors treat their bond holdings as an afterthought. A fund may hold short-term taxable bonds, but if you're in a high tax bracket and want a high yield, you might be better off investing in long-term municipal bonds.

Balanced funds are a fine solution for investors with modest resources who can afford to buy only one or two funds. But if you have the wherewithal to buy five funds or more, you're better off assembling a balanced portfolio with great stock funds and the best, most appropriate bond funds.

For help creating a mutual-fund portfolio that matches your investing goals, see Build Your Perfect Portfolio. Also see our Suggested Portfolios, which combine the Kiplinger 25 mutual funds into portfolios based on various investing time frames. And visit the Kiplinger Mutual Fund Center for fund rankings and more information about mutual funds.

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As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.