Asset Allocation: Old vs New with the Help of AI

Like many of you asking yourself where to invest your money, asset allocation becomes the most important decision.

I started managing my investments in the early 2000s, armed with a basic understanding of asset allocation and a determination to avoid financial advisor fees.

Two decades of DIY investing later (including some expensive mistakes during the 2008 crash), I’ve learned that smart portfolio management isn’t about following fancy Wall Street formulas – it’s about combining tried-and-true principles with the new tools at our disposal.

Here’s what’s exciting: AI is revolutionizing how we approach asset allocation, making institutional-grade portfolio analysis accessible to everyone.

In this guide, I’ll share exactly how I’ve adapted my portfolio strategy to blend traditional allocation wisdom with AI-powered insights, all while keeping costs low and maintaining control.

Whether you’re a seasoned DIY investor or just breaking free from your financial advisor, you’ll discover game-changing approaches to managing your money.

What is Asset Allocation?

Asset allocation is simply dividing your money between different asset types.

But now, asset allocation isn’t just about bonds and stocks. It also includes commodities, real estate, cash, and, nowadays, even digit assets.

Look how everything has performed since 2011.

Making decisions on relevant and impactful investments for one’s investment portfolio balances the risk and reward; if one part of your portfolio loses value, other parts can help balance it out.

Investing in AI has had a huge impact on portfolios in the last couple of years and will have a huge impact in the future now that we are part of an AI supercycle.

Should you worry about beating that elusive hurdle rate?

Hurdle rate, you know, that number that gets thrown around that says you need to beat to win the game of investing.

Ultimately, the goal is to pick a mix of assets that could give you the best return for a certain level of risk.

Why You Need to Know About Asset Allocation

Knowing how to spread out your investments can make a huge difference in reaching your financial goals. It helps you grow your money without too much worry.

Here’s why asset allocation matters:

• Lower Risk: Asset allocation spreads out risk so you’re not relying on just one investment.
• Better Returns: Diversification means your money is working for you in many places.
• Stay Calm: When the markets drop, a well-diversified portfolio can help you stay cool.
• Adjust to Market Changes: With options and AI, you can make quick changes when needed.
• Personalized Strategy: AI helps you create a mix that matches your personal needs.

Let’s say you have $100,000 to invest – A basic (old-school) allocation looks like this: 60% in stocks ($60,000), 30% in bonds ($30,000), and 10% in cash or cash equivalents ($10,000).

But here’s the kicker – these percentages aren’t random. They should reflect your situation, risk tolerance, and how many years you have until retirement.

I made the mistake of a high concentration on that “foreign oil company that was going to explode,”… which proceeded to have a 3x return on the upside, then collapse in a reverse split on the way down.

If you’re tired of feeling like you’re on a financial roller coaster, asset allocation is like putting on a seatbelt. By the end of this guide, you’ll understand how these modern tools can help make your investments both smart and safe.

Plus, asset allocation lets you be strategic. You can go for growth when things look good, or be cautious when the market is shaky — all without having to spend hours managing your portfolio. That’s the power of using AI and smart strategies.

Steps to Master Asset Allocation

Old asset allocation was about using fixed percentages and basic rules and letting it play like dominos.

Today, we’re going to look at a newer, more flexible way to handle your investments using AI, options, and other updated strategies.

Step 1: Know Your Risk Tolerance

Figure out how much risk you’re okay with because, let’s face it, everyone feels differently about risk.

Some people can handle losing a bit of money without stress, while others can’t stand it. If you panic over losing 5% of your portfolio in a month, you must invest more conservatively. Knowing your comfort level is the key to building the right mix of investments.

Ask yourself: How would I feel if my investments lost some value? Can I sleep well at night? Understanding your feelings about risk will help you decide how to build your portfolio.

Step 2: Pick Your Main Asset Classes

Your main assets are your core holdings, but how do you divide the pie? What is your relationship with risk and return?

Deciding between what mix of our money goes to the stock market or fixed income will affect the end of our investment objectives.

How Do the Rich Target Allocation?

There is value in modeling after successful people; maybe you ask yourself, “How do the rich invest their money?”

Timing in life is always everything. When I first put money to work, gold was around $300 per oz., but equities were up and down for almost two decades. If you were facing retirement at the moment in time, it would cause a lot of anxiety.

Traditional Investment Portfolios

You certainly can take the “Bogle approach” – a U.S. stock index fund and an intermediate bond fund. Talk about keeping it simple! And you know what? For decades, this bare-bones approach actually worked pretty well, delivering an impressive 9.38% annual return over 50 years from 1971 to 2021.

Or, take a conservative asset allocation depending on age, like Sam talks about over at Financial Samurai.

But here’s the thing – 2022 gave investors a massive wake-up call. Both stocks and bonds took a serious beating. Go back and look at that asset breakdown above, long duration treasuries have massively underperformed over the last few years.

Ouch! That’s when I realized something crucial: the success of traditional asset allocation wasn’t just about diversification – it was riding on the back of a historic bond bull market that’s unlikely to repeat itself.

Modern Portfolio Theory (MPT), pioneered by Harry Markowitz’s work, diversification became a topic, trying to find that sweet spot of mixing risk and return.

The answer is to buy a bunch of stocks, right? I have friends who have over 100 stocks in their portfolio. It’s a problem, and here’s why.

Burton Malkiel discussed this in his book – A Random Walk Down Wall Street. Yes, adding more reduces the portfolio’s risk, but it’s just market risk in the end, and you get the same return.

Other Various Asset Classes

The key difference between old-school vs. new-school asset allocation isn’t just about having more options – it’s about being smarter with how we use them.

Modern portfolio theory still works, but we’re not limited to the simple 60/40 cookie-cutter approach anymore.

With today’s tools and technologies, we can build portfolios that are truly personalized to our specific situation, not just following some predetermined split that worked for our parents’ generation.

At one point, some would consider a 1-2% Allocation to Bitcoin crazy.

It’s become more than just CNBC sound bites, It’s become a SOUND Investment.

And let’s be real – this shift requires more homework on our part as investors. But in my experience, the effort pays off when you see how a well-diversified, personalized portfolio handles market curveballs.

I’ve expanded my portfolio to include real estate funds, an options portfolio, and digital assets to spread the risk and take advantage of different opportunities.

And speaking of options, that leads to another way to look at allocations.

Step 3: Add Protection with Options

One of the biggest lessons I’ve learned over two decades of investing is that traditional asset allocation alone isn’t enough anymore – especially in today’s volatile markets. That’s where options come into play.

The explosion of the market, has made it something that can’t be ignored.

Now, I know what you’re thinking: “Aren’t options super risky?” I used to think the same way until I discovered how to use them defensively in my portfolio.

Here is a sample portfolio that won’t seem as risky with a little option allocation:

In fact, I now allocate a sizeable portion of my investable assets of my portfolio to option premium strategies, primarily using simple covered calls and cash-secured puts.

These strategies have allowed me to buy Tesla, my favorite AI stock, at a discount, and collect premium with puts and calls pocketing an additional 7% above what I’m currently up on the stock.

This modern approach to protection isn’t just about avoiding losses – it’s about creating multiple income streams while managing risk.

Sure, it takes more work than the old buy-and-hold strategy, but with today’s low-cost brokers and easy-to-use trading platforms, even us DIY investors can take a more active approach and implement these strategies effectively.

The key is to start simple and gradually expand your toolkit as you gain confidence.

Step 4: Use AI Insights

AI is like having an assistant who’s always on the job, instead of trying to get your financial advisor on the phone. AI can find patterns, help manage risks, and suggest when to make changes.

By using AI, you can make smarter decisions that are based on real data.

AI can also predict market movements by looking at both past data, but more importantly, at what’s happening now. This means you can adjust your investments before something big happens.

It’s like using GPS instead of guessing which road to take.

Step 5: Keep Watching and Adjust Your Modern “AI” Portfolio

Asset allocation isn’t something you do once and forget. Markets change, and your investments should, too.

I have a distaste for using the word passive because nothing is passive. If you think about it, there is always some active involvement in monitoring your passive investment portfolio.

Check your portfolio every few months or after big life changes to ensure it still fits your goals.

It also helps to look at how different parts of the market are doing. If technology is booming and AI suggests it will keep growing, you should invest more there. On the other hand, if risks seem high, you can pull back a bit.

Important Tips for Investment Portfolio Success

• When building your asset allocation strategy, remember that diversification isn’t about having as many different assets as you can. It’s about having the right mix.
• Using AI and options can make things more advanced, but it’s important to start simple and learn as you go.
• Patience is crucial. It’s easy to get caught up in the hype or panic during bad times.
• A well-diversified, and flexible portfolio can help keep you steady. Remember, asset allocation is about managing risk while keeping your long-term goals in sight.

Taking it to the Next Level with AI

Many investors may still feel overwhelmed with these different asset classes, but you can simplify by focusing on an AI ETF.

You can use more advanced AI tools once you’re comfortable with basic asset allocation and options. These can help predict market changes and suggest better ways to balance your investments.

Some beginner investors can benefit from the use of robo-advisors, like Betterment or Wealthfront to handle part of their portfolios while they still keep control.

Advanced AI platforms can also make custom strategies for you based on your lifestyle and goals. This helps find hidden links between different assets and make smarter choices.

Alternatives to Asset Allocation

If all this sounds too complicated, there are easier options.

Target-date funds, which isn’t my favorite, or robo-advisors and are simpler especially for beginner investors.

Target-date funds automatically change your investments as you get closer to a goal, like retirement. Robo-advisors can manage your portfolio based on simple preferences, so you don’t have to do much work.

Another choice is balanced funds. These are managed by professionals and include both stocks and bonds, giving you a diversified portfolio without much effort.

Bottom Line: My Experience with Asset Allocation

Building a modern portfolio through smart asset allocation is like putting together a complex puzzle. At first, it can feel overwhelming with all the pieces scattered about – stocks, bonds, ETFs, options, and AI-driven insights. But as you start fitting the pieces together, patterns emerge and you begin to see how each component complements the others.

After two decades of DIY investing, I’ve learned that combining traditional wisdom with new tools like AI and options creates a more complete picture.

The beauty of this approach is that your puzzle can evolve as markets change. Unlike the rigid 60/40 model of the past, today’s asset allocation is dynamic and adaptable.

AI helps you spot patterns you might miss, while options add both protection and income – they’re like those special corner pieces that help hold everything together. Don’t limit yourself to the simple puzzles of yesterday when you can build something more robust and resilient portfolio today keeping you on track toward your financial goals.