Asset Allocation

Asset allocation is the process of dividing your investments among different asset categories like stocks, bonds, and cash to balance risk and reward according to your goals, risk tolerance, and investment timeline.

Why Asset Allocation Matters

Research shows that asset allocation is responsible for about 90% of the variability in a portfolio's returns over time. It's more important than individual stock or fund selection.

Common Asset Classes

Equities (Stocks): Highest growth potential but also highest volatility
Fixed Income (Bonds): Moderate returns with lower volatility
Cash and Equivalents: Lowest risk but also lowest returns
Real Estate: Can provide both income and appreciation
Alternative Investments: Commodities, private equity, etc.

Age-Based Allocation

A common rule of thumb suggests subtracting your age from 110 to determine the percentage of your portfolio that should be in stocks.

For example, if you're 30 years old: 110 - 30 = 80% in stocks, 20% in bonds/cash.

Rebalancing

As market movements change the values of your assets, your allocation will drift from your target. Periodic rebalancing (selling higher-performing assets to buy lower-performing ones) helps maintain your desired risk level.