Asset allocation is the process of distributing money across different asset classes to maximize portfolio returns and minimize risk.
What is asset allocation?
- Asset allocation is the process of putting money across different asset classes to maximize portfolio returns and minimize risk.
- Many investors will have most of their portfolio allocated to stocks, bonds, and cash.
- Investors with longer time horizons can allocate more of their portfolio to stocks while those closer to their investment goals should hold safer assets like bonds or cash.
Asset allocation depends on an investor’s goals, time horizons, and risk tolerance. For example, if a 20-something investor is trying to save for retirement, he or she may want to allocate most money to stocks. Retirement is usually decades away, so very young investors have time to make up any losses before retirement. An investor closer to their investment goal may want to have more bonds in their portfolio because there is less time to make up losses. Investors looking to finance expenses in the near term should have their money in cash, one of the safest asset classes.
Many investors will have most of their portfolio allocated to stocks, bonds, and cash. There are many different types of stocks: large cap versus small cap, growth versus value, and U.S. versus foreign. The same is true for bonds, which include U.S. government, corporate, high yield, municipal, and foreign. Investors looking to invest in other asset classes can consider alternative investments like private equity or commodities. It’s best if these alternative investments make up small portions of a portfolio because of their volatility.