Asset Allocation
A portfolio design decision linking assets to objectives, liabilities, liquidity, horizon, taxes, and risk capacity—not a universal formula.
Asset allocation is the distribution of a portfolio across asset classes, regions, currencies, factors, and risk exposures. The appropriate allocation depends on objectives, liabilities, horizon, liquidity, taxes, constraints, expected returns, and uncertainty about volatility and correlations.
Frequently Asked Questions
Is asset allocation the biggest driver of returns?
That claim depends on what is measured. Studies may explain variation in a portfolio returns over time, differences among portfolios, or long-run outcomes, which are not the same question. Contributions, fees, security selection, timing, and liabilities also matter.
Is a 60/40 portfolio appropriate for most investors?
No universal allocation fits everyone. Inflation exposure, currency, liabilities, age, income stability, tax status, risk capacity, and available assets can make the same mix unsuitable.
Are historical correlations reliable inputs?
No. Correlations change across regimes and often rise during stress. Estimates depend on frequency, lookback, currency, valuation method, and chosen indexes.
Does diversification guarantee lower losses?
No. Diversification can reduce some concentration risk, but correlated declines, liquidity shocks, leverage, currency moves, and common factor exposure can still produce substantial losses.