What is Asset Allocation? | New to Investing - The Share Centre

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Asset allocation

What is asset allocation?

A balanced investment portfolio should contain a mix of asset (investment) types such as cash, shares and property. 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 crudely adjusting the percentage of asset types in your portfolio, you can vary the amount of risk you are exposed to and the potential return on your portfolio.

Asset types

The main asset types are:

 

  • Cash
  • Bonds
  • Property
  • Shares
  • Commodities

Example portfolios

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.

Asset allocation charts

Drilling down further

All investors are different, and as with everything, there are personal preferences that come into play when constructing an investment portfolio. 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

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

For example, assets in the 'low risk income portfolio' above are allocated as follows: cash 10%, bonds 60%, property 5%, shares 20% and commodities 5%. If shares rose 20% in value and bonds fell 6.5% over the course of a year, shares would then account for 24% of the portfolio and bonds 56%. If the portfolio is not rebalanced, the asset allocation (and the risk you are taking) will distort, and the investment goal you are pursuing will be harder to achieve. In this scenario, a low risk income investor is starting to take more risk than they were initially comfortable with. 

Let the experts do the hard work for you

If you don't feel comfortable or haven't got the time to allocate your own asset types, our three funds of funds, provide a solution. By investing in a wide variety of investments, they aim to cost-effectively spread risk and take care of asset allocation on behalf of investors. All you need to do is indicate your attitude to risk and investment objective:

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