asset allocation

Asset Allocation

The process of dividing a portfolio among major asset categories such as bonds, stocks or cash. The purpose of asset allocation is to reduce risk by diversifying the portfolio.

Notes:

The ideal asset allocation differs based on the risk tolerance of the investor. For example, a young executive might have an asset allocation of 80% equity, 20% fixed income, while a retiree would be more likely to have 80% in fixed income and 20% equities.

See also: Asset, Diversification, Portfolio, Risk, Strategic Asset Allocation, Tactical Asset Allocation

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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