Asset Allocation

Defining Asset Allocation

Asset allocation describes the percentage of

total assets invested in different investment
categories, also known as asset classes.

• The most common broad financial as-

set classes are stocks (or equity), bonds
(fixed income) and cash.
• Real estate, precious metals and “alter-
native investments” such as hedge funds
and commodities can be viewed as sec-
ondary asset classes.

• Each broad asset class has various sub-

classes with different risk and return pro-
files. In general, the more return an asset
class has historically delivered, the more
risk that its value could fall as well as rise
because of greater price volatility.
 • To earn higher potential returns, investors
have to take higher risk.

Asset classes differ by the level of potential

returns they have historically generated and
the types of risk they carry.

Virtually all investments involve some type

of risk that you might lose money.
Asset Subclasses of Stocks

1. Large cap stocks stocks of large, well es-

tablished and usually well known compa-
nies

2. Small cap stocks stocks of smaller, less

well known companies

3. International stocks stocks of foreign com-

panies
Large cap, small cap and international stocks
can in turn be further categorized as

• Value stocks whose prices are below their

true value for temporary reasons

• Growth stocks of companies that are grow-

ing at a rapid rate.
Asset Subclasses of Bonds

1. Different maturities long-term (10 years

or longer), intermediate-term (3-10 year)
or short-term (3 years or less)

2. Different issuers government and agen-

cies, corporate, municipal, international

3. Different types of bonds callable bonds,

zero-coupon bonds, inflation-protected bonds,
high-yield bonds, etc.
How Much of Your Portfolio Should Be
in Different Assets?

• The basic building blocks of any portfolio

are stocks, bonds or notes, derivative
assets, mutual funds, and interest-earning
cash deposits.

• Typically, your investment plan should in-

clude a healthy mix of all five.
• Deciding how much money you should
allocate to each type of investment de-
pends on your age and goals, and the
amount of risk that you can accept.

• The important principle to remember is

diversification dont put your entire sav-
ings into just on basket or one type of
investment.

• Unfortunately there is no hard and fast

rule, or formula, about how much to in-
vest and where to invest.
• Your investment strategy will change over
time, reflecting

– your investment horizon (how much

time there is between now and when
you want to access the money you are
investing)

– your risk tolerance (how much risk you

are willing to take in exchange for a
possible higher rate of return.)