A beginner's guide to asset allocation
Asset allocation is the practice of allocating assets across different types of investments - such as shares, bonds and cash in the bank. It is perhaps more commonly known as diversification. The theory goes that spreading investments across different asset classes can cut risk as different investments tend to behave differently over time. Pressures that cause the share market to go up or down may, for example, not impact bonds or cash in the same way. The US Securities and Exchange Commission website has a detailed description of asset allocation.
How to allocate your assets
The specifics of how much a person invests in a certain asset is personal choice - and also will likely reflect the desired duration of the investment, the investor's capacity to save and their attitude to risk. According to the lifecycle approach to investing - outlined in an eZonomics video - investors should consider tailoring their investments to their stage in life. An investor with several decades until retirement can typically take more investment risks than someone retiring the next five or 10 years. Investments such as property commodities and possibly hedge funds may also form part of an asset allocation strategy for more experienced investors.
Words of warning
Striking the asset allocation balance is not easy. ING Group chief economist Mark Cliffe examined how traditional diversification "didn't work" in the global financial crisis in his sixth of 10 video lessons on the crisis for eZonomics. In it, Cliffe said the search was on for new, smarter ways to diversity and to protect investments.