Asset Allocation

asset allocation

The assignment of investment funds to broad categories of assets. For example, an individual allocates funds to bonds and equities. Likewise, an investment manager may allocate clients' funds to common stocks representing various industries.

Should I expect my asset allocation plan to remain largely unchanged throughout my preretirement years, or should I anticipate occasional large-scale restructuring?

You should expect only modest shifts in your asset allocation during your working years. Two components combine to create an asset allocation plan: your own financial situation and risk tolerance, coupled with historic and expected investment performance by asset class. Unless one of these components changes dramatically, there should be only modest adjustments in your allocation. The kinds of personal change that can trigger significant allocation changes are marriage, divorce, disability, birth of children, or employment or income change. Major changes in inflation, interest rates, or unforeseen social or political shocks are the type of economic events that could trigger broad allocation shifts.

Mark G. Steinberg, President, Trabar Associates, Boston, MA

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Asset Allocation

An active management strategy for a portfolio or fund with a basic set of securities. The investor or money manager changes the securities represented in the portfolio or fund as one's investment goals change. It is important to note, however, that asset allocation implies diversification to the portfolio or fund. The investor or money manager may use fundamental, technical, and/or macroeconomic analysis in determining when and how to change the securities in the portfolio or fund.

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Asset allocation. Asset allocation is a strategy, advocated by modern portfolio theory, for reducing risk in your investment portfolio in order to maximize return.

Specifically, asset allocation means dividing your assets among different broad categories of investments, called asset classes. Stock, bonds, and cash are examples of asset classes, as are real estate and derivatives such as options and futures contracts.

Most financial services firms suggest particular asset allocations for specific groups of clients and fine-tune those allocations for individual investors.

The asset allocation model -- specifically the percentages of your investment principal allocated to each investment category you're using -- that's appropriate for you at any given time depends on many factors, such as the goals you're investing to achieve, how much time you have to invest, your tolerance for risk, the direction of interest rates, and the market outlook.

Ideally, you adjust or rebalance your portfolio from time to time to bring the allocation back in line with the model you've selected. Or, you might realign your model as your financial goals, your time frame, or the market situation changes.

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Asset Allocation

What Does Asset Allocation Mean?

An investment strategy that aims to balance risk and reward by spreading investments across three main asset classes—equities, bonds, and cash—in accordance with an individual's goals, risk tolerance, and investment horizon. Historically, different asset classes have varying degrees of risk and return and therefore behave differently over time.

Investopedia explains Asset Allocation

There is no simple formula to determine the proper asset allocation for every individual. However, the consensus among financial professionals is that asset allocation is one of the most important investment components. In other words, individual securities selection is secondary to the way an investor allocates investments across stocks, bonds, and cash. Some mutual funds, called life-cycle, or target-date funds, use asset allocation to provide investors with portfolios that align with an investor's age, appetite for risk, and investment objectives. However, some critics argue that these kinds of standardized funds are problematic because individual investors require individual solutions, not a one-size-fits-all approach.

Related Terms:
• Correlation
• Diversification
• Modern Portfolio Theory—MPT
• Portfolio
• Risk