Asset allocation is a term used to describe the proportionate mix of investment assets within a given investment strategy.
It refers to the way in which portfolios are constructed amongst different asset classes, or categories, such as stocks (also known as equities), bonds and infrastructure, commodities, commercial property and reserve cash.
There is no perfect mix, though asset allocation is used by investors and investment managers to benchmark their choices.
The balance between risk and reward, based on individual's goals, risk tolerance, and capacity for risk, varies between investors and is directly linked to the investment horizon.
The idea is to diversify investments to minimise the impact of market volatility on the overall portfolio.
For instance, younger investors might allocate more to stocks for growth, while older investors might prefer a higher percentage of bonds for greater stability.
Asset allocation is crucial because it helps manage risk and increase the probability of achieving financial goals, as relevant to each individual's personal circumstances.
It is also not a one-and-done exercise as regularly reviewing and adjusting your asset allocation is important. Such reviews will be aligning your asset allocation to new data points for relative performance and correlations between asset classes, ensuring the portfolio remains optimally aligned with changing financial needs and market conditions.
Achieving optimum asset allocation for a given portfolio, requires access to, and the ability to, properly comprehend all relevant data, for all asset classes, within the remit of a given portfolio type.