What is asset allocation?
Asset allocation describes what an investor or investment manager does when they choose which assets to include in a portfolio and, equally importantly, in what proportion. These can be traditional assets, such as stocks and bonds, or alternative assets, such as anything from commodities, currencies and real-estate to fine wines, art and vintage cars. The choices made will reflect the investment strategy of the person concerned.
Where have you heard about asset allocation?
Marketing literature for investment funds and asset managers will make frequent references to the 'asset allocation strategies' of the team responsible for assembling portfolios. Such firms may also give details of their asset-allocation philosophy. You may also hear analysts at investment banks sometimes referred to as 'asset allocation strategists'.
What you need to know about asset allocation.
Asset allocation is perhaps better thought of as asset selection. It is the investor's money that is allocated to different assets, from shares and bonds to the wilder shores of distressed debt or Old Master paintings.
Successful asset allocation is key to the performance of an investment portfolio. Every asset-allocation strategy is different, but most tend to seek diversification in order to reduce risk. So the strategy will seek to pick assets that have as little correlation to one another as possible, in order that a potential problem or loss for one asset does not become a general problem for the portfolio.
The objective is a balanced portfolio in which risk is minimised.