Asset Allocation

Asset allocation is the process of distributing money across different asset classes to maximize portfolio returns and minimize risk.

Asset allocation depends on an investor’s goals, time horizons, and risk tolerance. For example, if an investor in their twenties is trying to save for retirement, they 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 they have 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 US versus foreign. The same is true for bonds, which include US 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.