This week we are going to explore two concepts, 'Diversification' and 'Asset Allocation' which can have significant impact on investment success over the long term, and which are shrouded in mystery and often misunderstood. We are going to tell it like it is, share some insights which may surprise you, and give you some food for thought if this applies to you.
What Is Asset Allocation?
This is the term most commonly used to refer to the proportional distribution of an investment portfolio between different assets. The asset allocation of a portfolio will determine how much of that investment will be allocated to two or more different asset classes; the most common being Equities, Bonds, Property, Commodities and Cash. The rationale for allocating across asset classes is founded in the alleged correlation in returns between various assets at different points in the cycles of each. The principle here is that if the portion of your portfolio in 'asset A' is in a temporary decline that your portion in 'asset B' will be on the ascent. I say alleged because there is a lot of conflicting evidence as to whether there is a negative correlation or not. Ultimately this concept aims to deliver consistently positive returns while reducing volatility of the overall portfolio.