What is asset allocation?

Asset (investment) types

The main asset types are:

• Cash
• Bonds
• Property
• Shares
• Commodities

What is asset allocation?

A balanced investment portfolio should contain a mix of asset (investment) types, but what percentage of your portfolio should each account for?

Asset allocation is the method of balancing risk and reward by apportioning asset types according to your goals, attitude to risk and timescales. By adjusting the percentage of asset types as part of your investment portfolio management, you can vary the amount of risk you are exposed to and the potential return on your portfolio.

How your portfolio might look

Below are two examples of how asset types can be allocated at a high level. The low risk, income portfolio might be suitable for a retiree who prefers their investments to generate an income. The high risk, growth portfolio might be suitable for a 25-year-old who wants to accumulate wealth for retirement in c.30 years’ time, and is therefore seeking growth from their investments.

Drilling down further

All investors are different, and as with everything, there are personal preferences that come into play when undertaking investment portfolio management. For example, in the shares segment of your portfolio, how much should be held in large companies, medium-sized companies, or smaller companies? Similarly, should they be focussed on dividends (income) or more growth-orientated? Finally, should they be UK companies or overseas?

Rebalancing your assets

You should make a point to regularly review and rebalance the asset allocation in your portfolio, as not doing so can lead to distortions in the level of risk taken, which will impact returns over time.