“I think that the first thing is you should have a strategic asset allocation mix that assumes that you don’t know what the future is going to hold.” – Ray Dalio
Asset allocation is a financial term that describes how your assets are divided (or allocated) between different types of investment groups such as large company stocks, small company stocks, international bonds, government bonds, etc. Your asset allocation, not your individual investments, typically determines the majority of your investment return.
We make changes in our working habits, our eating habits, our recreational activities, and in many cases even the size and location of our home. It is equally important to make necessary changes to our financial portfolio, including our asset allocation, as things change in the economy, the market, and in our lives. For example, many retirees rely on their investment portfolio for some or all of their income and it is important that their asset allocation reflect this situation.
Asset allocation came out of financial research that illustrated how risk can be reduced through the diversification of investments that have varying patterns of return. It is based on observations showing that different asset classes have very different typical patterns of returns and price variations over long periods of time. This is an evolved extension of the old adage, “Don’t put all your eggs in one basket,” which inevitably prompts the question, “Which basket should I put them in, and how many in each?”
Developing proficiency in asset allocation takes time, study, and practice but since it is a significant factor in determining your return, it should not be overlooked. Seek the help of a proven, seasoned professional that you can trust if you need help with your asset allocation.