Asset allocation is an investment strategy that involves spreading financial resources across different asset classes, such as stocks, bonds, real estate, commodities, and cash. The main objective of this strategy is to diversify risk and maximize returns adjusted to the investor’s risk profile and financial goals.
This approach is based on the principle that different types of assets behave differently in the face of changes in market conditions. For example, while bonds tend to be more stable in periods of uncertainty, stocks tend to offer higher returns in bull markets. The right mix of assets can help reduce the volatility of a portfolio and protect it against adverse fluctuations.
Asset allocation is usually split into three main categories:
Equities (a.k.a. stocks): This includes shares, investment funds, and ETFs. They’ve got higher potential returns, but they’re also more volatile.
Fixed income: Think government or corporate bonds — these are more stable and give you predictable income.
Alternative assets: Real estate, commodities, or even crypto — these bring an extra layer of diversification.
Asset allocation is not a static strategy; It requires periodic adjustments based on factors such as changes in investor objectives, market conditions, and time horizon. This adjustment process is known as portfolio rebalancing and is critical to maintaining the desired risk profile.
In addition, investors often use models based on their risk tolerance:
A financial advisor can be key in designing an effective asset allocation strategy, considering the investor’s specific needs and market conditions.