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Financial Literacy

What is Investment Allocation Amount?

Investors need discipline when it comes to saving and investing consistently. To that end, most people set up an investment allocation amount: the authorization to incur expenses or liabilities for a specific amount, in a particular time period. In simpler terms, they designate a sum of money that they’ll invest regularly. 

Some investors do this through their employer-sponsored retirement plans. Others are diligent contributors to personal IRA accounts. Even recreational investors can demonstrate consistency by sticking to a defined schedule of funding and investing. 

When it comes to an investment allocation amount, there are several important factors to consider—among them, the interval, the amount and the strategy. Here’s what new investors need to know when setting up their investment allocation amount. 

Understand the investment allocation amount

How Much Will You Allocate?

The first and most important factor to determine when allocating investment funds is how much. Ideally, this figure will ensure enough buying power to obtain equities yet not so much that it’ll hamper your current budget. It also depends on what you’re investing in. 

Most investors select a percentage of their income or a specific dollar amount. For employer sponsored plans, this amount comes out even before it reaches your paycheck, which helps investors stay committed to their chosen investment allocation amount. Whatever dollar amount it is, it should be the same every time. Most experts recommend between 10-15% of pre-tax income

How Often Will You Invest?

One of the big benefits of consistent investment is the power of compound interest and its effect on accumulation. To take advantage of it, investors need to make regular contributions. Designating a defined investment allocation amount is one thing—sticking to a schedule for actually investing that amount is another. It’s best to automate this process, including through employer-sponsored retirement plans. 

Note that setting aside investment funds and deploying them happen at two different times. Some investors may have differing schedules. For example, they may allocate $500 from each paycheck in a month, then invest that $1000 once at the end of the month. 

Occasionally, investors may make a one-time lump sum investment, such as when they receive an inheritance or a work bonus. This can provide extra investing principal outside of regular allocations. 

What’s Your Investment Strategy?

Investment allocation amount needs to correlate to your asset allocation strategy. That is, what are you investing in and how are you balancing your portfolio? Whether it’s heavy in securities or trending toward annuities, the amount you set aside to invest needs to correlate to the price you expect to pay to acquire assets. 

For example, an investor with a blue-chip dividend portfolio will want to hold companies like Johnson & Johnson (NYSE: JNJ) and 3M Co (NYSE: MMM). These companies—and many other dividend aristocrats—have share prices in the hundreds of dollars per share. Therefore, investors will need to allocate higher amounts to justify buying shares in these companies. On the flip side, someone investing in balanced ETFs can acquire more shares at a lower cost, which means they can allocate a smaller portion of their budget to investing. 

Investment strategy ties heavily into frequency and investment allocation amounts. Consistency across the board is what leads to a strong, thriving investment portfolio. 

Automatic Investment Allocation Amounts

Most investors with an employer-sponsored retirement plan have automatic contributions set up to fund these accounts. In setting up these contributions, they specify an automatic investment allocation amount from their paycheck. This could be a percentage or a specific dollar amount. 

For example, Sabrina’s company offers a 401(k) program. She chooses to contribute $300 from each bi-weekly paycheck, resulting in an investment allocation amount of $600 per month to her retirement account. Meanwhile, her coworker Bart chooses to contribute 10% of his annual salary to retirement. Bart earns $60,000 annually, which means $6,000 goes toward retirement, at a rate of $500 per month ($250 per check). 

Consider Costs and Fees

While many brokerages now offer no-cost trades, investors still need to consider the cost of their investment. In many cases, the allocation amount won’t fully go toward the investment. For example, if a brokerage charges a fee per trade, that fee comes off the top of the allocated amount. Moreover, a personal investment manager may charge a $200 monthly administrative fee, taken out of the allocation. The higher the fee, the lower the allocation.

It’s important to observe these fees and how they’re incurred. If they come out before the money is invested, it’s a reduction of investment principle. This may mean allocating more to cover these costs and maintain the original allocation amount. If fees come out during the course of the investment or after realizing gains/losses, they impact real rate of return; allocation isn’t impacted. 

Consistency is Key for Investing

The purpose of specifying an investment allocation amount is to keep investors consistent. Whether it’s through an employer-sponsored plan that deducts direct from your paycheck or through a self-appointed strategy, moving money into investments regularly is the key to building wealth. And it’s also important to retiring comfortably. To learn more, sign up for the Wealthy Retirement e-letter below. 

Following a schedule that dictates how much, how often and how you invest makes it easier to stay the course, accumulate wealth and benefit from the natural appreciation of the market. 

A given investment allocation amount also prioritizes investing. Made a habit, it’s easy to automatically count those funds as invested and it becomes second nature to budget around them. For many people, the simple practice of allocating is enough to make them diligent, consistent investors—even if they’re not the ones executing transactions.


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