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 Strategic Asset Allocation?

    A strategic asset allocation takes a long-term approach to help an investor achieve their financial goals. Here's how it 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. 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.
  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

    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.
  8. Investing

    5 Things To Know About Asset Allocation

    Overwhelmed by investment options? Learn how to create an asset allocation strategy that works for you.
  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

    How to Build Your Optimally-Balanced Portfolio

    How do you build an optimally balanced portfolio? A lot depends on your appetite for risk, and your understanding of rebalancing.
Frequently Asked Questions
  1. Depreciation Can Shield Taxes, Bolster Cash Flow

    Depreciation can be used as a tax-deductible expense to reduce tax costs, bolstering cash flow
  2. What schools did Warren Buffett attend on his way to getting his science and economics degrees?

    Learn how Warren Buffett became so successful through his attendance at multiple prestigious schools and his real-world experiences.
  3. How many attempts at each CFA exam is a candidate permitted?

    The CFA Institute allows an individual an unlimited amount of attempts at each examination.Although you can attempt the examination ...
  4. What's the average salary of a market research analyst?

    Learn about average stock market analyst salaries in the U.S. and different factors that affect salaries and overall levels ...
Trading Center