Asset allocation means diversifying your investments between different types of assets. This can help protect you from large losses in your portfolio.
An asset can be anything from your home to the right to receive royalties from a book you have written. However, when people talk about asset allocation, they usually mean money invested directly in the capital markets. Below we look at the key role asset allocation plays in your investment strategy.
What is asset allocation?
Asset allocation means that you allocate your money among different assets such as stocks, fixed income securities and cash equivalents. Each of these assets reacts differently to different market trends, so combining these assets in your portfolio will help you minimize losses when the market is down.
In general, the younger you are, the more shares you should own. This is because you have a longer investment period during which you can make up for losses if they occur, and the stock market as a whole tends to rise over time. More experienced investors may have a higher percentage of fixed income stocks and rely more on recurring income than big stock gains.
Asset allocation is a key component of any investment strategy. Your portfolio needs to be diversified, and how you distribute your holdings will partly determine how diversified you are.
Asset Class Types
Each asset class offers different degrees of risk and reward. Here are the three most common asset classes, ranked from least risky to most risky:
Cash: This is the least risky type of asset, but the return is negative when inflation is taken into account. This category includes money market funds and certificates of deposit.
Bonds: There are many types of bonds, but they are all fixed income investments. The safest are US Treasury bonds. They are 100% guaranteed by the federal government and offer slightly higher returns than cash. Government and municipal bonds offer slightly more risk and reward. Corporate bonds offer higher yields but have a higher default risk. This is especially true for junk bonds. You should also look at international bonds, including emerging market bonds, as well as domestic bonds.
Stocks: They are more risky than bonds since you can lose 100% of your investment. Stocks provide the highest returns over time and usually outperform inflation. Shares are divided into three subcategories depending on the size of capitalization: small, medium and large. Like bonds, you should own international and emerging market stocks, as well as domestic stocks.
There are many other classes that you should also consider:
Real Estate: This includes investment property, such as rentals, investments in a real estate investment trust (REIT), or some type of pooled real estate fund. Experts disagree on whether the house you live in, if you own it, should be included in this distribution.
Derivatives: They offer the highest risk and highest return. Keep in mind that you may lose more than your investment.
Commodities: Risk can vary as there are many types. However, most investors should own shares in an oil-related mutual fund, as oil should rise in the long run as supplies shrink. It is generally recommended to invest no more than 10% in gold.
Currencies: Since the dollar is declining in the long run, it is useful to have assets denominated in foreign currencies such as the euro. When the dollar is weak, then the euro is strong. These two mixed economies are the same size, so they compete with each other in the foreign exchange market.
How does asset allocation work?
Consider Sarah, an investor who has $10,000. She decides to split her money into three parts: stocks, fixed income securities, and cash. She first decides to invest 60% of her money in stocks. She then decides to divide this amount between the categories of large companies such as Coca-Cola and Reebok, and small companies that most people have never heard of, called "small caps".
Sarah buys $4,000 in index funds that track large caps and $2,000 in index funds that track small caps. She invests $3,500, or 35%, in a fixed income investment split equally between US Treasury bills and municipal bonds (city or state). Finally, she keeps $500 in cash, which she holds in a money market account.
When the inevitable downturn hits the market, Sarah will be better protected from big losses thanks to her investments in bonds, which are not as volatile as stocks. But when the stock market takes off, most of her stock portfolio will perform well.
Asset Allocation and Your Goals
How much should you allocate for each asset? It depends on three factors:
Your investment goals: Are you planning for retirement, are you already retired, or are you saving money for a down payment on a house?
Time Horizon: How soon will you need the money?
Risk Tolerance: Can you tolerate when your investment drops sharply at times, knowing that you will earn higher returns in the long run?
Your goals, time horizon, and risk tolerance will determine the model you should use. If you can tolerate high risk in order to earn high returns, you will invest more in stocks and mutual funds. People with low risk tolerance will prefer bonds. Those who are risk averse or who need money within the next year should have more cash.
Asset Allocation Versus Diversification
While asset allocation is an important part of building a diversified portfolio, it is not exactly the same concept as diversification. You can spread your money among several types of assets without diversifying them properly. For example, if all the stocks in your portfolio are just a few large-cap stocks, you don't diversify them for better growth.
Diversifying your portfolio means covering different levels of risk and return with different investments. Allocation is one way to do this, but you should always go further and diversify each asset class.
Why proper distribution is important
Allocation of assets based on an individual investment strategy is what almost every investor considers good practice. Even billionaires and institutional investors lose money at certain stakes, but because they are properly hedged, this ensures that they do not suffer significant damage from one bad investment.
The balance between equities, fixed income and cash is also important as this strategy allows for macroeconomic changes beyond the investor's horizon. The correct distribution of funds allows you to take into account currency fluctuations and major geopolitical events, providing the investor with protection from large-scale falls.
Background Video 1 : Download
Background Video 2 : Download
Reflection : Download
Main conclusions
Asset allocation is the process of allocating your investments among different types of assets to protect against market changes.
Investors typically put some of their investments in stocks, bonds and cash equivalents, but there are other types of assets to consider as well, including real estate, commodities and derivatives.
The best combination for you depends on your investment goals, time horizons and risk tolerance.
invested equity
cost of equity
capital asset
fixed capital
asset liabilities capital
large cap small cap mid cap
victory capital usaa
cost of equity capital
calculating cost of equity
capital dynamic
owners equity in accounting
capitaland investment management share price
litigation capital management share price
capital work in progress
large cap companies
fixed capital examples
top asset by market cap
bond capital
capital fund management
wam capital share price
capital asset management
capital asset examples
assets capital
quaero capital
schroders capital
private debt investing
capital group global equity
asset link capital
cgt on shares
capital works deduction
capital investment advisors
capital allowance iras
examples of capital investment
private real estate investing
taxation on sale of shares
all active asset capital
section 1231 property
long term capital asset
short term capital asset
brookfield oaktree
total capital investment
capitalising assets
fixed capital investment
ordinary asset
types of capital assets
land improvements depreciation
capital assets in income tax
investment in fixed assets
examples of capital market instruments
vct investment
large cap growth
capital and financial account
vivriti asset management
oaktree brookfield
growth equity funds
writing off stock losses
prime asset ventures inc
debt and equity markets
fidelity capital and income fund
large cap growth stocks
large cap equity
financial capital examples
bluebay capital
assets liabilities and capital
calculating cgt on shares
capital allowance on buildings
usaa victory capital
western asset mortgage capital
depreciable property
equity capital examples
digital asset capital management
capital reserve account
securitize markets
growth equity investment
capital ledger account
large cap value stock
all active asset capital share price
capital work in progress in balance sheet
super deduction qualifying assets
bmo equity research
falcon investment management
cresset asset management
total owners equity
capital equipment examples
ascensive assets
cost of fixed assets
anchorage hedge fund
stonepine asset management
net capital investment
capital group global equity fund
oaktree capital stock
victory capital mutual funds
cost of equity example
market cap assets
fengate private equity
land improvements depreciation life
capital asset pricing
cgt rollover
victory capital stock
pre cgt asset
capital market securities examples
cgt on sale of shares
fixed income capital markets
capital market is a market for which fund
owner's equity on balance sheet
mid cap large cap
westbridge funds management
all active asset capital limited
aqr hedge fund
capital assets includes
total net investment losses
duff and phelps equity risk premium
ab capital amc ipo
list of capital assets
cgt asset
capital inventory
aum capital share price
cgt deceased estate
examples of land improvements
investment management technology
blackrock capital investments
alternative investment capital
robeco capital growth funds
net investment in operating capital
kempen asset management
fiera global equity
barclays capital aggregate bond index
pimco capital securities fund
the cost of equity
itc on fixed assets
asian trust capital
white oak asset management
tangible capital assets
carnelian asset management
land and capital
capital cost allowance vehicle
reliance asset management
sterling funds
market cap equity value
stag fund management
blackstone gp stakes
depreciation of capital assets
venture capital fund manager
cgt on sale of business
oak tree asset management
pantera blockchain fund
market cap equity
oak hill asset management
hsbc pollination
hsbc pollination climate asset management
brookfield capital
capital global equity fund
american funds capital world growth and income r6
usaa mutual funds victory capital
fairtree asset management
coronation capital plus fund
cresset capital management
fiera capital aum
net net working capital
cip fixed assets
capital allowance assets
div 43 capital works
capital group assets under management
business capital examples
bain capital assets under management
first trust capital partners
assets equals liabilities plus capital
cgt on land sale
capital market deals with term funds
land improvements accounting
capital asset tax
cost of capital and cost of equity
8 capital asset management
writing off investment losses
large cap stocks examples
sale of capital assets
small cap and large cap
capital asset accounting
capital light business
capital goods share list
blue ridge asset management
capital fund company
super deduction qualifying plant and machinery
capital group international equity
united capital money market fund
apollo capital fund
aventicum real estate
first trust capital strength barclays 5 index
capital money market fund
capital works depreciation
capital asset management ltd
united capital asset management
yarra funds management
sequoia hedge fund
euro pacific capital stock
equity capital management
net investment in capital assets
tikehau private equity
amp capital infrastructure
reliance capital asset management ltd
intangible capital expenditure examples
amazon working capital
capital asset planning
average cost of equity
cgt on land
amp managed funds
alternative fund advisors
cgt on inherited shares
active asset reduction
market cap asset
ordinary share capital in balance sheet
sale of shares income tax
accounting treatment of website development costs
capital lease depreciation
capital goods share price
visio fund management
net capital stock
tikehau capital stock
bridge fund management
capital goods sector stocks
committed capital private equity
principal large cap fund growth
apollo funds management
net investment loss
reliance focused large cap fund
1251 asset management
hwang investment
pershing square capital management holdings
western asset mortgage capital corp
capital international global equity
davidson kempner real estate
affin hwang capital asset management
aqr capital management assets under management
egerton capital equity fund
giverny capital asset management
capital group asset management
blue mountain asset management
first ally asset management
asset plus liabilities equals capital
div 40 depreciation
gasb 34 capital assets
vcm global asset management
small business active asset reduction
leasehold improvements depreciation ato
small business cgt rollover
capital asset exchange and trading
capital allowance deduction
cip construction in progress
oasis fund management
capital reserves real estate
euro pacific capital funds
aegon kames
investment in operating capital
as for fixed assets
trust capital markets
mountain capital investment advisors
assets minus liabilities equals capital
fiera capital corp stock
blue asset capital
wam capital share price asx
private equity assets under management
nuveen capital
tikehau stock
reliance capital asset management limited
div 40 depreciation ato
apollo global capital inc stock price
tax treatment of negative capital account
scion asset management minimum investment
pollination hsbc
cgt discount shares
bluecove asset management
oaktree capital management stock
baron capital aum
arch investment management
pershing square capital holdings
binary capital investment management
capital global equity
veritas capital fund management
pm capital enhanced yield fund
black swan hedge fund
gladstone hedge fund
matrix hedge fund
capital international asset management
international mutual funds taxation
arclight private equity
total capital works
leasehold improvements ato
bison capital asset management
constant cost of equity capital
50 active asset reduction
asset capital aps
baron funds aum
icg private equity portfolio
the cost of equity capital
blue owl asset management
capital equals assets plus liabilities
southport capital john woods
vtb capital investment management
cgt real estate
samba capital & investment management company
orix asset management
capital under management
fiera global equity fund
market cap of assets
gasb capital assets
short term and long term capital assets
debt free net working capital
capital group fixed income
intangible capital examples
global bond market cap
hayfin aum
amp capital sale
sequoia assets under management
msci real capital analytics
find cost of equity
aquila capital holding gmbh
trust capital advisors
oaktree hedge fund
trp capital appreciation fund
litigation capital management stock
oaktree capital share price
gtcr wells fargo
anchor capital share price
amp capital share price
capital fixed income fund
victory capital funds
capital dynamics clean energy
short term capital asset example
western asset mortgage
msd capital real estate
new capital global equity conviction fund
examples of intangible capital expenditure
capital loss on sale of house in estate
largest market cap assets
isq global infrastructure fund
principal investment management
asc 360 capitalizable costs
first capital asset management
victory capital aum
all asia asset capital share price
capital group global equity fund f
polar capital technology trust plc share price
advantus capital management
wrm capital asset management
psab 3150
barclays capital global aggregate bond index
black diamond hedge fund
brookfield acquires oaktree
oaktree capital brookfield
total capital and liabilities
western mortgage capital
capital market mutual funds
oasis investment management
cost of capital cost of equity
emerging fund managers seed capital
inventory capital
oaktree capital real estate
bluebay financial capital bond fund
capital asset management llc
apex investment management
fiera capital subsidiaries
hps investment partners aum
tower hedge fund
cgt active asset
reliance capital mutual fund
capital is passive fund from a business perspective
mirae venture capital
capital bay fund management
david brown victory capital
agg capital management
all asset capital
amp infrastructure fund
cgt and deceased estates
starwood asset management
capital items in accounting
human capital is the most valuable asset of an organization
yarra asset management
wfam sale
all asia asset capital
euro pacific capital gold fund
western asset mortgage capital stock
oaktree capital holdings
finance lease and operating lease accounting treatment
rhb capital fund price
centuria capital no 2 fund
bluegold capital asset management
reverence private equity
capital invested in land and machinery is termed as
aqr assets under management
geode asset management
amp capital community infrastructure fund
citic private equity funds management
carlson capital aum
paradigm capital value fund sicav
kames capital aegon
agg capital management limited
capital group global equity stock price
autonomy hedge fund
l1 capital global opportunities fund
fiera international equity fund
lighthouse funds management
wells fargo private equity
alliance capital mutual fund
keppel capital alternative asset
amber fund management
baird investment management
white oak equity partners
capital money management
peregrine hedge fund
lgt capital partners aum
grosvenor fund management
capital appreciation stocks
kames investment international
capital dynamics aum
arclight investments
doubleline asset management
cw capital asset management
eagle large cap value equity fund
capital group global equity morningstar
pershing square assets under management
ncb cap funds
synergy capital asset management
atlas hedge fund
working capital per share
oaktree capital private equity
oaktree assets under management
market cap of midcap stocks
new capital ucits fund plc
polaris asset management
capital dynamics limited
companies that generate profits through investment and management of capital
geode capital management fidelity
capital group global equity f
f&c capital & income investment trust plc share price
capital fund management sa
lotus halal fixed income fund
capital account accounting example
alkhabeer diversified income traded fund
asset link capital shawbrook
yarra capital management australian equities
mid cap to large cap
demolition cost of old building is a capital expenditure
unissued share capital in balance sheet
amp capital income generator fund
pantera digital asset fund
amp capital multi asset fund
amp community infrastructure fund
john breckenridge capital dynamics
estate capital management
capital dynamics arevon
kayne anderson growth equity
morgan creek asset management
oak hill investment management
capital group global equity fund price
cheyne capital real estate
all cap mutual funds
personal capital assets under management
l1 capital global opportunities master fund
nine masts investment fund
cost of equity cost of capital
spx asset management
genoa asset management
anchorage capital group aum
amp capital stock
capital dynamics group
diamond hedge fund
sequoia capital hedge fund
all active asset capital limited share price
victory capital reputation
colony northstar stock
gtcr llc and reverence capital partners
wells fargo gtcr
fiera capital emerging markets fund
cgt discount on foreign shares
hm investment management
social capital assets under management
gtcr and reverence capital partners
quaero capital funds
amp capital china growth fund
vanguard capital value fund
york capital hedge fund
capital growth assets
all active asset capital stock
archegos capital assets under management
while calculating income from business capital expenditure is for deduction
mma capital management stock
jo hambro global select fund b
somerset capital partners aum
social capital hedge fund
amp capital global shares index fund
western asset mortgage stock
all asset capital shares
dyal capital stock
capital dynamics kkr
geode hedge fund
slate annaly
amp capital dynamic markets fund
sale of wells fargo asset management
polar capital global technology fund morningstar
capital dynamics stock
