What is Asset Allocation?
In simple terms, asset allocation refers to the balance between growth- and income-oriented investments in a portfolio. This allows the investor to take advantage of the risk/reward tradeoff and benefit from both growth and income. Here are the basic steps to asset allocation:

  1. Choosing which asset classes to include (stocks, bonds, money market, real estate, precious metals, etc.)
  2. Selecting the ideal percentage (the target) to allocate to each asset class
  3. Identifying an acceptable range within that target
  4. Diversifying within each asset class

If you are unfamiliar with asset allocation, see the tutorial: Asset Allocation.

In addition, the article Achieving Optimal Asset Allocation contains further pointers on how to appropriately allocate assets to the various asset classes.


Of course, the appropriate mix for a particular client depends upon many of the factors discussed in section 12, including risk tolerance, time horizon and financial goals. For example, an IA with a client who owns commercial real estate properties or a number of rental homes would probably not recommend REITs or other real estate securities in the portfolio.

Risk Tolerance
The client's risk tolerance is the single most important factor in choosing an asset allocation. Most IAs will create a risk-tolerance questionnaire (or use one provided with their financial planning software) to make sure they have an accurate measure of risk. At times, there may be a distinct difference between the risk tolerance of a client and his/her spouse, so care must be taken to reach consensus on how to proceed. Also, risk tolerance may change over time, so it's important to periodically revisit the topic.

Time Horizon
Clearly, the time horizon for each of the client's goals will affect the asset allocation mix. Take the example of a client with a very high tolerance for risk. The recommended allocation to stocks will be much higher for the client's retirement portfolio than for the money being set aside for the college fund of the client's 13-year-old child.



Strategic vs. Tactical Asset Allocation

Related Articles
  1. Financial Advisor

    An Introduction to Asset Allocation

    A portfolio is only as strong as its asset allocation. To create the right one, investors need to determine their risk tolerance, time horizon and goals.
  2. Managing Wealth

    6 Asset Allocation Strategies That Work

    Your portfolio's asset mix is a key factor in whether it's profitable. Find out how to get this delicate balance right.
  3. Investing

    What Is Tactical Asset Allocation?

    Here's how tactical asset allocation, an extension of strategic asset allocation, works.
  4. Financial Advisor

    Asset Allocation vs. Security Selection: The Main Differences

    Both are important to a long-term investment strategy, but asset allocation and security selection have different missions.
  5. Tech

    Tips for Assessing a Client's Risk Tolerance

    Determining a client’s risk tolerance is a critical piece of the puzzle in designing and appropriate asset allocation.
  6. Managing Wealth

    Achieving Optimal Asset Allocation

    Minimizing risk while maximizing return with the right mix of securities is the key to achieving your optimal asset allocation.
  7. Investing

    6 Asset Allocation Strategies That Work

    An asset mix should reflect an investor’s current goals. Here are a few strategies for establishing the right allocation.
  8. Investing

    Strategic Asset Allocation to Rebalance Portfolios

    This involves setting allocations for various asset classes, then yearly rebalancing the portfolio when it deviates from the initial settings.
  9. Financial Advisor

    Which Asset Allocation is Best for Clients?

    Modern Portfolio Theory is showing its age. So which asset allocation model is best?
  10. Investing

    5 Things to Know About Asset Allocation

    Overwhelmed by investment options? Learn how to create an asset allocation strategy that works for you and builds toward retirement.
Frequently Asked Questions
  1. How does the number of credit card accounts I have affect my credit score?

    Your credit score, which is also referred to as your FICO score, is a measure that creditors use to assess your potential ...
  2. What is the 'three-legged stool'?

    The "three-legged stool" was a retirement terminology from the past that many financial planners used to describe the three ...
  3. If I am looking to get an investment banking job, what education do employers prefer? MBA or CFA?

    If you are looking specifically for an investment banking position, an MBA may be marginally preferable over the CFA. The ...
  4. Is a Simplified Employee Pension (SEP) IRA tax deductible?

    Learn everything you need to know about your SEP IRA, including the benefits to employers and whether or not a SEP IRA is ...
Trading Center