Asset Allocation
How to distribute your investments across different asset classes.
Asset Allocation
Asset allocation is the process of dividing your investments among different asset categories — like stocks, bonds, and cash — to balance risk and reward according to your goals, risk tolerance, and investment timeline.
Why Asset Allocation Matters
Research shows that asset allocation is responsible for about 90% of the variability in a portfolio's returns over time. It's more important than individual stock or fund selection.
Common Asset Classes
- Equities (Stocks): Highest growth potential but also highest volatility — best for long time horizons
- Fixed Income (Bonds/Debt Funds): Moderate returns with lower volatility — stabilizes the portfolio
- Cash and Equivalents (Savings/Liquid Funds): Lowest risk but lowest returns — for short-term needs
- Real Estate: Can provide both rental income and long-term appreciation
- Gold: Hedge against inflation and currency risk, low correlation to equities
Age-Based Allocation
A common rule of thumb: subtract your age from 110 to determine the percentage of your portfolio in stocks.
- Age 25: 85% equity, 15% debt/cash
- Age 40: 70% equity, 30% debt/cash
- Age 60: 50% equity, 50% debt/cash
Rebalancing
As market movements change the values of your assets, your allocation drifts from your target. Periodic rebalancing — typically once a year — sells higher-performing assets to buy lower-performing ones, maintaining your desired risk level.
Diversification Within Asset Classes
Don't just diversify across asset classes — diversify within them. In equities, spread across sectors (technology, healthcare, banking, consumer goods) and geographies (domestic + international).