Asset Allocation

updated: January 21, 2010

Asset Allocation means deciding what proportions of your investment portfolio should be held in:

(1) broad asset classes, eg equities, bonds, property and cash.

(2) what markets, eg regions, countries, how much in the UK, how much in emerging markets

(3) what sectors, eg healthcare, technology and commodities

The principles of diversification to reduce the overall volatility and therefore risk of a portfolio, suggest that investors should aim to spread their investments.  Different types of investments react to economic and financial conditions in different ways, smoothing out the fluctuations.  For example, cash retains its nominal value when equity markets fall, and fixed interest securities appreciate when interest rates drop.

Various academic studies have shown that asset allocation is the single most important factor in determining the returns of an investment portfolio.  Secondary factors like fund selection or market timing are less important when compared to being in the right asset class (or mix of asset classes) at the right time.

To obtain further information please click here for our pdf Guide to Asset Allocation .