Asset allocation is the process of deciding the appropriate weightings of different asset classes within a portfolio, each of which is designed to capture a specific risk/reward characteristic. Simply put, the asset-allocation decision is the most important decision an investor will make, as more than 90% of a portfolio’s return is attributable to this single decision.
Because individuals vary as to their risk tolerance, return needs and time horizon, there is not a single, optimal, allocation for all investors. If you have a long investment horizon and a willingness to assume risk, you should have a higher allocation to equities than an investor with a shorter time horizon or who is more risk averse. Though your portfolios will look very different, you both share a common goal of obtaining the highest return for the amount of risk you are taking.
Effective asset allocation allows you to optimize your portfolio and target a specific risk/return profile that matches your goals and objectives.
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