As a practicing physician, you are probably taking steps to both pay down your debt as well as save for the future. You could throw all of your money into a mattress and hope for the best, or you can strategically deposit your funds into various products and assets. According to The Balance, asset allocation is the practice of spreading your savings amid a variety of asset classes to protect the whole of your wealth in case one or more of these sectors performs poorly.

Although often used synonymously, asset allocation is different from diversification in that within each asset class there is an opportunity for diversification. In other words, you can have broad asset allocation while still lacking in healthy diversifications. For example, you can have your funds in certificates of deposit (CDs), the stock market, and have some real estate holdings. This would give you varied asset allocation, however, if all of your stock market holdings are only in large (ie, blue-chip) companies in the healthcare sector, you don’t have a robust diversification within your asset allocation.

There are several types of assets; these include:

  • Cash
  • CDs
  • Bonds
  • Stocks
  • Real Estate
  • Derivatives
  • Commodities
  • Currencies
  • Cryptocurrencies

In addition to these investment vehicles, assets also include partnerships in businesses, annuities, the home you own, etc. The key to successful asset allocation is to determine what your risk tolerance is based on your age and your target date for retirement. If you are just starting out, you can afford to take on a bit of risk and can, therefore, allocate your assets more heavily toward the stock market, which can be a great deal more volatile than bonds, CDs, or cash. If retirement is just a few years away, however, you should tip the scales a bit more toward low-risk assets. Contact your financial advisor to help you calculate your ideal mix of asset allocation.