What is Asset Allocation

Asset Allocation is an investment strategy that attempts to balance risk and reward by apportioning your investments over multiple asset classes.  The general idea is that instead of investing the bulk of your assets in a particular investment or sector, by choosing different investments over several different sectors, there is a greater likelihood of generating a more consistent positive return over the long term and can help mitigate the affect of dramatic market swings on your portfolio.

Asset Allocation uses the assumption that each asset class will react somewhat differently to an event.  For example, news on the price of oil may cause investments in one asset class to decline where conversely the value of other investments will rise.

If you the investor where focused on obtaining consistent income then your portfolio will be heavily weighted in fixed income.  If you were more focused on long-term growth then you portfolio would most likely be more heavily weighted in equities or some variation of growth-oriented investments.

Basic Asset Classes

The following are just some of the basic asset classes that one might include in their portfolio and the below image shows how ones investments might be allocated.  This is different for every investor based on may factors, such as age, income needs, risk tolerance, etc:

  • Cash and cash alternatives
  • U.S. equities
  • Non-U.S. equities
  • Fixed income
  • Real estate
  • Alternative investments

This is a hypothetical example to be used for illustrative purposes only

 Asset allocation does not ensure a profit or protect against a loss. Investing involves risk and investors may incur a profit or a loss. There is an inverse relationship between interest rate movements and fixed income prices. Generally, when interest rates rise, fixed income prices fall and when interest rates fall, fixed income prices rise. International investing involves special risks, including currency fluctuations, different financial accounting standards, and possible political and economic volatility. Declines in the value of real estate, economic conditions, property taxes, tax laws and interest rates all present potential risks to real estate investments. Alternative investments involve specific risks that may be greater than those associated with traditional investments and may be offered only to clients who meet specific suitability requirements, including minimum-net-worth tests.
This information is not a complete summary or statement of all available data necessary for making an investment decision. Investing involves risk and investors may incur a profit or a loss. You should discuss any tax matters with the appropriate professional.