Learning Centre
Big Picture Investing: Asset Allocation (March 2010)
Monday, March 01, 2010
What is Asset Allocation?
Asset allocation is the process of determining how an investment portfolio should be allocated among different asset classes. The three main asset classes - equities, fixed income, and cash - exhibit different levels of risk and return over time. Diversifying investments prudently and timing when and where to focus across these asset classes can help maximize potential returns while minimizing risk. The allocation decision will be impacted by the investor’s risk tolerance, time horizon, and investment objectives.
The Importance of Asset Allocation
Studies have shown that over the longer-term, asset allocation decisions account for about 90% of the variance of a portfolio’s performance. Many investors spend a tremendous amount of time dedicated to individual security selection. Given the importance of asset allocation, neglecting to focus on this decision can have a significant detrimental impact on a portfolio’s potential returns and risk level. Investing a small amount of time on the “bigger picture” allocation decision can significantly impact portfolio performance.