Asset allocation

The split of capital across broad asset types - equities, bonds, property, cash - expressed as target percentages. The decision that sits above choosing individual holdings.

Example

A $100,000 portfolio at 60/40 falls to $90,000 when equities drop 20% and bonds rise 5%, against $80,000 for an all-equity version.

Important

Set it from your dates and your capacity to absorb a loss, not from a view on which asset class currently looks attractive. Dates are facts; views are forecasts.

Related terms

• Risk capacity — How much loss your circumstances could actually absorb without damaging your plans - a financial fact, separate from how a loss would make you feel.
• Glide path — A planned shift in asset allocation over time, usually towards more stable assets as the date the money is needed approaches.
• Rebalancing — Buying or selling to bring a portfolio back to its intended mix after markets move it out of shape.

Lessons that explain it

• The job bonds do: a date, a sum, and a different response to the same shock — Only fixed income lets you name the amount and the day in advance. The diversification argument is the one usually made for it, and it is the one that has failed. (8 min)
• Certainty on a date, and the ability to act — Cash does two jobs no other holding can do: it will be there in full on a known date, and it lets you act without having to sell something first. It pays for both by losing purchasing power, reliably. (8 min)
• Sometimes the only thing that rose, sometimes the thing that fell furthest — It genuinely protects a portfolio in some shocks and genuinely makes them worse in others, and the average of those two behaviours describes neither. That is the honest case, and it is a case for a small deliberate position. (10 min)
• A sized bet, renewed on purpose — If it belongs anywhere, it belongs as a position small enough that a total loss is survivable - and the diversification argument most often used to justify it has a habit of failing in exactly the weeks it is needed. (9 min)
• Asset allocation: the decision above the holdings — How much you hold in each broad type of asset shapes your experience far more than which particular items you choose inside them - and it is the decision most people spend the least time on. (14 min)
• Rebalancing: returning to the plan — Left alone, a portfolio drifts towards whatever has done best - which is the same as drifting towards a bet on the recent past continuing. Rebalancing is the small, unpleasant act that undoes it. (9 min)

All 578 terms in the Investing glossary