Investing basics
Asset allocation is the decision about how much of a portfolio belongs in broad exposure groups such as shares, bonds and cash. It sets the portfolio's main sources of risk and return.
Make it click
Before choosing brands of ingredients, decide how much grain, vegetable and protein the meal needs. Changing those proportions alters the meal more than switching between similar ingredients within one group.
Now put that into markets
An investor chooses broad asset weights before or alongside individual securities. Those weights reflect objectives, horizon, capacity for loss, liquidity needs and willingness to accept uncertainty.
Strategic allocation sets a long-term mix; tactical allocation makes shorter-term deviations. The actual exposure can differ from labels because funds, derivatives and currencies overlap.
Measure allocation through to the underlying assets and include cash, borrowing and concentrated employer holdings. Compare the mix with the job the portfolio is meant to do.
Historic relationships can change, and broad categories contain diverse risks. An allocation is a decision framework, not a guarantee that losses will remain within a chosen range.
Takeaway
