Asset Allocation
Asset allocation is the process of distributing a portfolio's assets according to an individual's goals, risk tolerance, and investment horizon. The three main asset classes—stocks, fixed income, and cash equivalents—have different levels of risk and return, and therefore, they perform differently over time.
Definition
Asset allocation is the process of distributing investments among different asset categories, such as stocks, fixed income, and cash equivalents, based on an individual's goals, risk tolerance, and investment horizon. These asset classes have different risk and return characteristics, and they perform differently over time.
Origin
The concept of asset allocation dates back to the 1950s when Harry Markowitz introduced Modern Portfolio Theory (MPT). His research demonstrated that proper asset allocation can maximize the expected return of a portfolio for a given level of risk.
Categories and Characteristics
Asset allocation is primarily divided into three categories: stocks, fixed income, and cash equivalents. Stocks typically have higher risk and potential high returns, suitable for long-term investors. Fixed income (such as bonds) has lower risk and provides stable returns, suitable for investors with lower risk tolerance. Cash equivalents (such as money market funds) have high liquidity and the lowest risk but also the lowest returns, suitable for short-term investments or emergency funds.
Comparison with Similar Concepts
Asset allocation is closely related to portfolio management, but asset allocation focuses more on how to distribute different types of assets, while portfolio management includes asset selection, monitoring, and adjustment.
Specific Cases
Case 1: Young investor A, aged 25, with high risk tolerance and a long investment horizon. His asset allocation might be 70% stocks, 20% fixed income, and 10% cash equivalents. Case 2: Retiree B, aged 65, with low risk tolerance and a short investment horizon. His asset allocation might be 20% stocks, 50% fixed income, and 30% cash equivalents.
Common Questions
1. How to determine your risk tolerance? You can assess it through questionnaires or discussions with a financial advisor. 2. How often should asset allocation be adjusted? It is usually recommended to adjust annually or when significant life events occur.
