1. Financial Concepts: Introduction
  2. Financial Concepts: The Risk/Return Tradeoff
  3. Financial Concepts: Diversification
  4. Financial Concepts: Dollar Cost Averaging
  5. Financial Concepts: Asset Allocation
  6. Financial Concepts: Random Walk Theory
  7. Financial Concepts: Efficient Market Hypothesis
  8. Financial Concepts: The Optimal Portfolio
  9. Financial Concepts: Capital Asset Pricing Model (CAPM)
  10. Financial Concepts: Conclusion


It's no secret that throughout history common stock has outperformed most financial instruments. If an investor plans to have an investment for a long period of time, his or her portfolio should be comprised mostly of stocks. Investors who don't have this kind of time should diversify their portfolios by including investments other than stocks.

For this reason, the concept of asset allocation was developed. Asset allocation is an investment portfolio technique that aims to balance risk and create diversification by dividing assets among major categories such as bonds, stocks, real estate, and cash. Each asset class has different levels of return and risk, so each will behave differently over time. At the same time that one asset is increasing in value, another may be decreasing or not increasing as much.

The underlying principle of asset allocation is that the older a person gets, the less risk he or she should take on. After you retire, you may have to depend on your savings as your only source of income. It follows that you should invest more conservatively because asset preservation is crucial at this time in life.

Determining the proper mix of investments in your portfolio is extremely important. Deciding what percentage of your portfolio you should put into stocks, mutual funds, and low risk instruments like bonds and treasuries isn't simple, particularly for those reaching retirement age. Imagine saving for 30 or more years only to see the stock market decline in the years before your retirement! For many, this is what happened during the bear market of 2000 and 2001. To determine your asset allocation plan, we strongly suggest that you speak to an investment advisor who can customize a plan that is right for you.


Financial Concepts: Random Walk Theory
Related Articles
  1. 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.
  2. 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.
  3. 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.
  4. Financial Advisor

    4 Steps to Building a Profitable Portfolio

    This is a step-by-step approach to determining, achieving and maintaining optimal asset allocation.
  5. 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.
  6. Financial Advisor

    Are You A Disciplined Investor?

    Don't let "financial porn" steer you away from a sensible, long-term approach to investing.
  7. Financial Advisor

    The 401(k) Emergency Boomers Need to Address Now

    The asset allocations of Baby Boomers’ 401(k)s are dangerously out of balance. Here's how to remedy that.
  8. 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.
  9. 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.
  10. Investing

    Introduction to Investment Diversification

    Reducing risk and increasing returns in your portfolio is all about finding the right balance.
Frequently Asked Questions
  1. What is the difference between secured and unsecured debts?

    The differences between secured and unsecured debt, and how banks buffer risks associated with each type of loan through ...
  2. How Many Times has Warren Buffett Been Married?

    Warren Buffett has been married twice in his life, but the circumstances surrounding the marriages were unconventional.
  3. What's the smallest number of shares of stock that I can buy?

    Many people would say the smallest number of shares an investor can purchase is one, but the real answer is not as straightforward. ...
  4. What is an economic moat?

    An economic moat refers to a company's ability to maintain competitive advantages to protect its long-term profits and market ...
Trading Center