Target allocation explained: where should each dollar go?
Understand target allocation, how to choose percentages, and how to measure drift and direct monthly contributions with a worked dollar example.
A target allocation is the percentage of your portfolio you want in each asset class, such as 50% stocks, 20% REITs, 20% ETFs, and 10% fixed income. It turns a vague plan into a rule that tells you where each new dollar should go.
This guide explains how to choose targets, how to measure drift from them, and how to direct contributions toward the most underweight classes. Targets here are illustrative, not recommendations.
What a target allocation does for you
Without a target, each month’s buy is driven by whatever looks exciting. With one, you buy what the plan is missing. This quietly forces discipline: you add to the classes that lagged and ease off those that ran ahead.
The targets should reflect your goals, time horizon, and tolerance for losses, not the latest headlines. A 30-year-old building long-term wealth and a retiree living off dividends will rightly choose different mixes.
How to choose the percentages
Start with the role each class plays. Stocks drive growth. REITs add real-estate exposure and income. Broad ETFs provide diversification at low cost. Fixed income dampens volatility and provides stability.
- Keep the number of classes small, usually four to six, so the plan stays maintainable.
- Use round numbers such as 50/20/20/10. Precision beyond that is false comfort.
- Write the reason next to each target so you do not abandon it in a panic.
- Revisit targets when your life changes, not when markets move.
Measuring drift with a real example
Imagine a $50,000 portfolio with targets of 50% stocks, 20% REITs, 20% ETFs, and 10% fixed income. Today you hold $28,000 in stocks (56%), $8,000 in REITs (16%), $10,000 in ETFs (20%), and $4,000 in fixed income (8%).
You plan to contribute $1,500. The new total is $51,500, so the dollar targets are $25,750 for stocks, $10,300 for REITs, $10,300 for ETFs, and $5,150 for fixed income. Stocks are $2,250 over target and need nothing. REITs are $2,300 short, ETFs $300 short, and fixed income $1,150 short, a total gap of $3,750.
Splitting the $1,500 in proportion to the shortfalls gives about $920 to REITs, $120 to ETFs, and $460 to fixed income. No selling and no taxable event was needed.
Gap = (Portfolio value + Contribution) × Target % − Current class value
Common mistakes to avoid
The most common error is treating the target as a prediction. It is a rule for behavior, not a forecast. Another is ignoring where an asset class sits. Hold the high-yield REITs and bonds in tax-advantaged accounts when possible, and look at allocation across all accounts together.
- Too many classes make rebalancing a chore you will skip.
- Changing targets after a bad quarter locks in the wrong lesson.
- Counting each account separately hides your true allocation.
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Put your target allocation to work
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