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Asset allocation is the implementation of an
investment strategy In finance, an investment strategy is a set of rules, behaviors or procedures, designed to guide an investor's selection of an investment portfolio. Individuals have different profit objectives, and their individual skills make different tactics ...
that attempts to balance
risk In simple terms, risk is the possibility of something bad happening. Risk involves uncertainty about the effects/implications of an activity with respect to something that humans value (such as health, well-being, wealth, property or the environ ...
versus reward by adjusting the percentage of each
asset In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value of ownership that can b ...
in an investment
portfolio Portfolio may refer to: Objects * Portfolio (briefcase), a type of briefcase Collections * Portfolio (finance), a collection of assets held by an institution or a private individual * Artist's portfolio, a sample of an artist's work or a ...
according to the investor's
risk tolerance Risk appetite is the level of risk that an organization is prepared to accept in pursuit of its objectives, before action is deemed necessary to reduce the risk. It represents a balance between the potential benefits of innovation and the threats ...
, goals and investment time frame. The focus is on the characteristics of the overall portfolio. Such a strategy contrasts with an approach that focuses on individual assets.


Description

Many financial experts argue that asset allocation is an important factor in determining returns for an investment portfolio. Asset allocation is based on the principle that different assets perform differently in different market and
economic An economy is an area of the Production (economics), production, Distribution (economics), distribution and trade, as well as Consumption (economics), consumption of Goods (economics), goods and Service (economics), services. In general, it is ...
conditions. A fundamental justification for asset allocation is the notion that different
asset classes In finance, an asset class is a group of marketable financial assets that have similar financial characteristics and behave similarly in the marketplace. These instruments can be distinguished as either having to do with real assets or having ...
offer returns that are not perfectly
correlated In statistics, correlation or dependence is any statistical relationship, whether causal or not, between two random variables or bivariate data. Although in the broadest sense, "correlation" may indicate any type of association, in statistic ...
, hence diversification reduces the overall
risk In simple terms, risk is the possibility of something bad happening. Risk involves uncertainty about the effects/implications of an activity with respect to something that humans value (such as health, well-being, wealth, property or the environ ...
in terms of the variability of returns for a given level of
expected return The expected return (or expected gain) on a financial investment is the expected value of its return (of the profit on the investment). It is a measure of the center of the distribution of the random variable that is the return. It is calculated ...
. Asset diversification has been described as "the only free lunch you will find in the investment game". Academic research has painstakingly explained the importance and benefits of asset allocation and the problems of
active management Active may refer to: Music * ''Active'' (album), a 1992 album by Casiopea * "Active" (song), a 2024 song by Asake and Travis Scott from Asake's album ''Lungu Boy'' * Active Records, a record label Ships * ''Active'' (ship), several com ...
(see academic studies section below). Although the risk is reduced as long as
correlations In statistics, correlation or dependence is any statistical relationship, whether causal or not, between two random variables or bivariate data. Although in the broadest sense, "correlation" may indicate any type of association, in statistics ...
are not perfect, it is typically forecast (wholly or in part) based on statistical relationships (like correlation and
variance In probability theory and statistics, variance is the expected value of the squared deviation from the mean of a random variable. The standard deviation (SD) is obtained as the square root of the variance. Variance is a measure of dispersion ...
) that existed over some past period. Expectations for return are often derived in the same way. Studies of these forecasting methods constitute an important direction of academic research. When such backward-looking approaches are used to forecast future returns or risks using the traditional mean-variance optimization approach to the asset allocation of
modern portfolio theory Modern portfolio theory (MPT), or mean-variance analysis, is a mathematical framework for assembling a portfolio of assets such that the expected return is maximized for a given level of risk. It is a formalization and extension of Diversificatio ...
(MPT), the strategy is, in fact, predicting future risks and returns based on history. As there is no guarantee that past relationships will continue in the future, this is one of the "weak links" in traditional asset allocation strategies as derived from MPT. Other, more subtle weaknesses include seemingly minor errors in forecasting leading to recommended allocations that are grossly skewed from investment mandates and/or impractical—often even violating an investment manager's "common sense" understanding of a tenable portfolio-allocation strategy.

Asset classes

An
asset class In finance, an asset class is a group of marketable financial assets that have similar financial characteristics and behave similarly in the marketplace. These instruments can be distinguished as either having to do with real assets or having ...
is a group of economic resources sharing similar characteristics, such as riskiness and return. There are many types of assets that may or may not be included in an asset allocation strategy.


Traditional assets

The "traditional" asset classes are ''stocks'', ''bonds'', and ''cash'': *
Stock Stocks (also capital stock, or sometimes interchangeably, shares) consist of all the Share (finance), shares by which ownership of a corporation or company is divided. A single share of the stock means fractional ownership of the corporatio ...
s: value, dividend, growth, or sector-specific (or a "blend" of any two or more of the preceding); large-cap versus mid-cap, small-cap or micro-cap; domestic, foreign (developed), emerging or frontier markets * Bonds (fixed income securities more generally): investment-grade or junk (high-yield); government or corporate; short-term, intermediate, long-term; domestic, foreign,
emerging markets An emerging market (or an emerging country or an emerging economy) is a market that has some characteristics of a developed market, but does not fully meet its standards. This includes markets that may become developed markets in the future or we ...
*
Cash In economics, cash is money in the physical form of currency, such as banknotes and coins. In book-keeping and financial accounting, cash is current assets comprising currency or currency equivalents that can be accessed immediately or near-i ...
and cash equivalents (e.g.,
deposit account A deposit account is a bank account maintained by a financial institution in which a customer can deposit and withdraw money. Deposit accounts can be savings accounts, current accounts or any of several other types of accounts explained bel ...
,
money market fund A money market fund (also called a money market mutual fund) is an open-end mutual fund that invests in short-term debt securities such as US Treasury bills and commercial paper. Money market funds are managed with the goal of maintaining a hig ...
) Allocation among these three provides a starting point. Usually included are hybrid instruments such as
convertible bond In finance, a convertible bond, convertible note, or convertible debt (or a convertible debenture if it has a maturity of greater than 10 years) is a type of bond that the holder can convert into a specified number of shares of common stock in ...
s and preferred stocks, counting as a mixture of bonds and stocks.


Alternative assets

Other alternative assets that may be considered include: * Valuable
economic goods In economics, goods are anything that is good, usually in the sense that it provides welfare or utility to someone. Alan V. Deardorff, 2006. ''Terms Of Trade: Glossary of International Economics'', World Scientific. Online version: Deardorffs' ...
and
consumer good A final good or consumer good is a final product ready for sale that is used by the consumer to satisfy current wants or needs, unlike an intermediate good, which is used to produce other goods. A microwave oven or a bicycle is a final good. Whe ...
s such as precious metals and other valuable tangible goods. * Commercial or residential real estate (also
REIT A real estate investment trust (REIT, pronounced "reet") is a company that owns, and in most cases operates, income-producing real estate. REITs own many types of real estate, including office and apartment buildings, studios, warehouses, hos ...
s) * Collectibles such as art, coins, or stamps *
Insurance Insurance is a means of protection from financial loss in which, in exchange for a fee, a party agrees to compensate another party in the event of a certain loss, damage, or injury. It is a form of risk management, primarily used to protect ...
products (
annuity In investment, an annuity is a series of payments made at equal intervals based on a contract with a lump sum of money. Insurance companies are common annuity providers and are used by clients for things like retirement or death benefits. Examples ...
,
life settlement A life settlement or viatical settlement (from Latin ''viaticum'', something received before death) is the sale of an existing life insurance policy (typically of seniors) for more than its cash surrender value, but less than its net death benefi ...
s,
catastrophe bond Catastrophe bonds (also known as cat bonds) are a subset of insurance-linked securities (ILS) that transfer a specified set of risks from a sponsor to investors. They were created and first used in the mid-1990s in the aftermath of Hurricane And ...
s, personal
life insurance Life insurance (or life assurance, especially in the Commonwealth of Nations) is a contract A contract is an agreement that specifies certain legally enforceable rights and obligations pertaining to two or more parties. A contract typical ...
products, etc.) *
Derivative In mathematics, the derivative is a fundamental tool that quantifies the sensitivity to change of a function's output with respect to its input. The derivative of a function of a single variable at a chosen input value, when it exists, is t ...
s such as options, collateralized debt, and
futures Futures may mean: Finance *Futures contract, a tradable financial derivatives contract *Futures exchange, a financial market where futures contracts are traded *''Modern Trader'', formerly Futures, an American finance magazine Music * ''Futures' ...
* Foreign
currency A currency is a standardization of money in any form, in use or circulation as a medium of exchange, for example banknotes and coins. A more general definition is that a currency is a ''system of money'' in common use within a specific envi ...
*
Venture capital Venture capital (VC) is a form of private equity financing provided by firms or funds to start-up company, startup, early-stage, and emerging companies, that have been deemed to have high growth potential or that have demonstrated high growth in ...
*
Private equity Private equity (PE) is stock in a private company that does not offer stock to the general public; instead it is offered to specialized investment funds and limited partnerships that take an active role in the management and structuring of the co ...
*
Distressed securities In corporate finance, distressed securities are security (finance), securities over companies or government entities that are experiencing Financial distress, financial or operational distress, Default (finance), default, or are under bankruptcy. ...
*
Infrastructure Infrastructure is the set of facilities and systems that serve a country, city, or other area, and encompasses the services and facilities necessary for its economy, households and firms to function. Infrastructure is composed of public and pri ...


Allocation strategy

There are several types of asset allocation strategies based on investment goals, risk tolerance, time frames and diversification. The most common forms of asset allocation are: strategic, dynamic, tactical, and core-satellite.


Strategic asset allocation

The primary goal of strategic asset allocation is to create an asset mix that seeks to provide the optimal balance between expected risk and return for a long-term investment horizon.Idzorek, Thomas M., "Strategic Asset Allocation and Commodities"
Ibbotson Associates, 27 March 2006,
Morningstar, Inc. Morningstar, Inc. is an American financial services firm headquartered in Chicago, Illinois, founded by Joe Mansueto in 1984. It provides an array of investment research and investment management services. With operations in 29 countries, Mornin ...
Generally speaking, strategic asset allocation strategies are agnostic to economic environments, i.e., they do not change their allocation postures relative to changing market or economic conditions.


Dynamic asset allocation

Dynamic asset allocation is similar to strategic asset allocation in that portfolios are built by allocating to an asset mix that seeks to provide the optimal balance between expected risk and return for a long-term investment horizon. Like strategic allocation strategies, dynamic strategies largely retain exposure to their original asset classes; however, unlike strategic strategies, dynamic asset allocation portfolios will adjust their postures over time relative to changes in the economic environment.


Tactical asset allocation

Tactical asset allocation Tactical asset allocation (TAA) is a dynamic investment strategy that actively adjusts a portfolio's asset allocation. The goal of a TAA strategy is to improve the risk-adjusted returns of passive management investing. Strategy descriptions TA ...
is a strategy in which an investor takes a more active approach that tries to position a portfolio into those assets, sectors, or individual stocks that show the most potential for perceived gains.Blitz, David and Van Vliet, Pim
"Global Tactical Cross-Asset Allocation: Applying Value and Momentum Across Asset Classes"
''
The Journal of Portfolio Management ''The Journal of Portfolio Management'' is a quarterly academic journal for finance and investing, covering topics such as asset allocation, performance measurement, market trends, risk management, and portfolio optimization. The journal was estab ...
'', Fall 2008, pp. 23–28.
While an original asset mix is formulated much like strategic and dynamic portfolio, tactical strategies are often traded more actively and are free to move entirely in and out of their core asset classes.


Core-satellite asset allocation

Core-satellite allocation strategies generally contain a 'core' strategic element making up the most significant portion of the portfolio, while applying a dynamic or tactical 'satellite' strategy that makes up a smaller part of the portfolio. In this way, core-satellite allocation strategies are a hybrid of the strategic and dynamic/tactical allocation strategies mentioned above.


Classification

Industry sectors may be classified according to an industry classification taxonomy (such as the
Industry Classification Benchmark The Industry Classification Benchmark (ICB) is an industry classification taxonomy launched by Dow Jones and FTSE in 2005 and now used by FTSE International and STOXX. It is used to segregate markets into sectors within the macroeconomy. The ICB ...
). The top-level sectors may be grouped as below: * Morningstar X-ray ** Defensive *** Consumer Staples *** Health Care *** Utilities ** Sensitive *** Energy *** Industrials *** Technology *** Telecommunications ** Cyclical *** Consumer Discretionary *** Basic Materials *** Financials *** Real Estate Per the Tactical asset allocation strategy above, an investor may allocate more to cyclical sectors when the economy is showing gains, and more to defensive when it is not.


Academic studies

In 1986, Gary P. Brinson, L. Randolph Hood, and SEI's Gilbert L. Beebower (BHB) published a study about asset allocation of 91 large
pension fund A pension fund, also known as a superannuation fund in some countries, is any program, fund, or scheme which provides pension, retirement income. The U.S. Government's Social Security Trust Fund, which oversees $2.57 trillion in assets, is the ...
s measured from 1974 to 1983. Gary P. Brinson, L. Randolph Hood, and Gilbert L. Beebower, "Determinants of Portfolio Performance", ''The Financial Analysts Journal'', July/August 1986. They replaced the pension funds' stock, bond, and cash selections with corresponding market indexes. The indexed quarterly return was found to be higher than the pension plan's actual quarterly return. The two quarterly return series' linear
correlation In statistics, correlation or dependence is any statistical relationship, whether causal or not, between two random variables or bivariate data. Although in the broadest sense, "correlation" may indicate any type of association, in statistics ...
was measured at 96.7%, with shared variance of 93.6%. A 1991 follow-up study by Brinson, Singer, and Beebower measured variance of 91.5%. Gary P. Brinson, Brian D. Singer, and Gilbert L. Beebower, ''Determinants of Portfolio Performance II: An Update'', The Financial Analysts Journal, 47, 3 (1991). The conclusion of the study was that replacing active choices with simple asset classes worked just as well as, if not even better than, professional pension managers. Also, a small number of asset classes was sufficient for financial planning. Financial advisors often pointed to this study to support the idea that asset allocation is more important than all other concerns, which the BHB study is incorrectly thought to have lumped together as "
market timing Market timing is the strategy of making buying or selling decisions of financial assets (often stocks) by attempting to predict future market price movements (market trends). The prediction may be based on an outlook of market or economic condition ...
" but was actually policy selection.Meir Statman, "The 93.6% Question of Financial Advisors", ''
The Journal of Investing ''The Journal of Investing'' is a quarterly peer-reviewed academic journal that covers research on investment management, asset allocation, performance measurement, benchmarking, mutual funds, investing strategies such as 130/30 funds, global alloc ...
'', Spring 2000, Vol. 9, No. 1: pp. 16–20
One problem with the Brinson study was that the cost factor in the two return series was not clearly discussed. However, in response to a letter to the editor, Hood noted that the returns series were gross of management fees.L. Randolph Hood, "Response to Letter to the Editor", ''The Financial Analysts Journal'' 62/1, January/February 2006 In 1997, William Jahnke initiated a debate on this topic, attacking the BHB study in a paper titled "The Asset Allocation Hoax".William Jahnke, "The Asset Allocation Hoax", '' Journal of Financial Planning'', February 1997 The Jahnke discussion appeared in the '' Journal of Financial Planning'' as an opinion piece, not a peer reviewed article. Jahnke's main criticism, still undisputed, was that BHB's use of quarterly data dampens the impact of compounding slight portfolio disparities over time, relative to the benchmark. One could compound 2% and 2.15% quarterly over 20 years and see the sizable difference in cumulative return. However, the difference is still 15 basis points (hundredths of a percent) per quarter; the difference is one of perception, not fact. In 2000, Ibbotson and Kaplan used five asset classes in their study "Does Asset Allocation Policy Explain 40, 90, or 100 Percent of Performance?".Roger G. Ibbotson and Paul D. Kaplan, "Does Asset Allocation Policy Explain 40%, 90%, or 100% of Performance?", ''The Financial Analysts Journal'', January/February 2000 The asset classes included were large-cap US stock, small-cap US stock, non-US stock, US bonds, and cash. Ibbotson and Kaplan examined the 10-year return of 94 US balanced
mutual fund A mutual fund is an investment fund that pools money from many investors to purchase Security (finance), securities. The term is typically used in the United States, Canada, and India, while similar structures across the globe include the SICAV in ...
s versus the corresponding indexed returns. This time, after properly adjusting for the cost of running
index fund An index fund (also index tracker) is a mutual fund or exchange-traded fund (ETF) designed to follow certain preset rules so that it can replicate the performance of a specified basket of underlying investments. The main advantage of index fun ...
s, the actual returns again failed to beat index returns. The linear correlation between monthly index return series and the actual monthly actual return series was measured at 90.2%, with shared variance of 81.4%. Ibbotson concluded 1) that asset allocation explained 40% of the variation of returns across funds, and 2) that it explained virtually 100% of the level of fund returns.
Gary Brinson Gary P. Brinson is a former investor and money manager. He is the founder of Brinson Partners a Chicago-based asset management firm acquired in 1994 by Swiss Bank Corporation, the predecessor of UBS, and Adams Street Partners. Prior to retiring ...
has expressed his general agreement with the Ibbotson-Kaplan conclusions. In both studies, it is misleading to make statements such as "asset allocation explains 93.6% of investment return".James Dean Brown, "The coefficient of determination", ''Shiken: JALT Testing & Evaluation SIG Newsletter'', vol. 7, no. 1, March 2003. Even "asset allocation explains 93.6% of quarterly performance variance" leaves much to be desired, because the shared variance could be from pension funds' operating structure. Hood, however, rejects this interpretation on the grounds that pension plans, in particular, cannot cross-share risks and that they are explicitly singular entities, rendering shared variance irrelevant. The statistics were most helpful when used to demonstrate the similarity of the index return series and the actual return series. A 2000 paper by Meir Statman found that using the same parameters that explained BHB's 93.6% variance result, a hypothetical financial advisor with perfect foresight in ''tactical'' asset allocation performed 8.1% better per year, yet the strategic asset allocation still explained 89.4% of the variance. Thus, explaining variance does not explain performance. Statman says that strategic asset allocation is movement ''along'' the
efficient frontier In modern portfolio theory, the efficient frontier (or portfolio frontier) is an investment portfolio which occupies the "efficient" parts of the risk–return spectrum. Formally, it is the set of portfolios which satisfy the condition that n ...
, whereas tactical asset allocation involves movement ''of'' the efficient frontier. A more common sense explanation of the Brinson, Hood, and Beebower study is that asset allocation explains more than 90% of the volatility of returns of an overall portfolio, but will not explain the ending results of your portfolio over long periods of time. Hood notes in his review of the material over 20 years, however, that explaining performance over time is possible with the BHB approach but was not the focus of the original paper.L. Randolph Hood, "Determinants of Portfolio Performance – 20 Years Later", ''The Financial Analysts Journal'', 61/5 September/October 2005. Bekkers, Doeswijk and Lam (2009) investigate the diversification benefits for a portfolio by distinguishing ten different investment categories simultaneously in a mean-variance analysis as well as a
market portfolio Market portfolio is an investment portfolio that theoretically consisting of a weighted sum of every asset in the market, with weights in the proportions that they exist in the market, with the necessary assumption that these assets are infinite ...
approach. The results suggest that real estate, commodities, and high yield add the most value to the traditional asset mix of stocks, bonds, and cash. A study with such broad coverage of asset classes has not been conducted before, not in the context of determining capital market expectations and performing a mean-variance analysis, neither in assessing the global market portfolio.Bekkers Niels, Doeswijk Ronald Q. and Lam Trevin
Strategic "Asset Allocation: Determining the Optimal Portfolio with Ten Asset Classes"
''
The Journal of Wealth Management ''The Journal of Wealth Management'' is a quarterly academic journal covering the management of high-net-worth taxable portfolios. Articles offer practical investment strategies in private wealth management, commentary on estate and financial plan ...
'', vol. 12, no. 3, pp. 61-77, 2009.
Doeswijk, Lam and Swinkels (2014) argue that the portfolio of the average investor contains important information for strategic asset allocation purposes. This portfolio shows the relative value of all assets according to the market crowd, which one could interpret as a benchmark or the
optimal portfolio Portfolio optimization is the process of selecting an optimal portfolio (asset distribution), out of a set of considered portfolios, according to some objective. The objective typically maximizes factors such as expected return, and minimizes co ...
for the average investor. The authors determine the market values of equities, private equity, real estate, high yield bonds, emerging debt, non-government bonds, government bonds, inflation linked bonds, commodities, and hedge funds. For this range of assets, they estimate the invested global market portfolio for the period 1990 to 2012. For the main asset categories equities, real estate, non-government bonds, and government bonds they extend the period to 1959 until 2012. Doeswijk, Lam and Swinkels (2019) show that the global market portfolio realizes a compounded real return of 4.45% per year with a standard deviation of 11.2% from 1960 until 2017. In the inflationary period from 1960 to 1979, the compounded real return of the global market portfolio is 3.24% per year, while this is 6.01% per year in the disinflationary period from 1980 to 2017. The average return during recessions was -1.96% per year, versus 7.72% per year during expansions. The reward for the average investor over the period 1960 to 2017 is a compounded return of 3.39% points above the risk-less rate earned by savers. Historically, since the 20th century, US equities have outperformed equities of other countries because of the
competitive advantage In business, a competitive advantage is an attribute that allows an organization to outperform its competitors. A competitive advantage may include access to natural resources, such as high-grade ores or a low-cost power source, highly skille ...
US has due to its large
GDP Gross domestic product (GDP) is a monetary measure of the total market value of all the final goods and services produced and rendered in a specific time period by a country or countries. GDP is often used to measure the economic performance o ...
.


Performance indicators

McGuigan described an examination of funds that were in the top quartile of performance during 1983 to 1993.Thomas P. McGuigan, "The Difficulty of Selecting Superior Mutual Fund Performance", '' Journal of Financial Planning'', February 2006. During the second measurement period of 1993 to 2003, only 28.57% of the funds remained in the top quartile. 33.33% of the funds dropped to the second quartile. The rest of the funds dropped to the third or fourth quartile. In fact, low cost was a more reliable indicator of performance.
Bogle A bogle, boggle, or bogill is a Northumbrian,''Rambles in Northumberland, and on the Scottish border ...'' by William Andrew Chatto, Chapman and Hall, 1835 Cumbrian and Scots term for a ghost or folkloric being,''The local historian's tabl ...
noted that an examination of five-year performance data of large-cap blend funds revealed that the lowest cost quartile funds had the best performance, and the highest cost quartile funds had the worst performance.The Implications of Style Analysis on Mutual Fund Performance Evaluation
/ref>


Return versus risk trade-off

In asset allocation planning, the decision on the amount of
stock Stocks (also capital stock, or sometimes interchangeably, shares) consist of all the Share (finance), shares by which ownership of a corporation or company is divided. A single share of the stock means fractional ownership of the corporatio ...
s versus bonds in one's portfolio is a very important decision. Simply buying stocks without regard of a possible
bear market A market trend is a perceived tendency of the financial markets to move in a particular direction over time. Analysts classify these trends as ''secular'' for long time-frames, ''primary'' for medium time-frames, and ''secondary'' for short time ...
can result in
panic selling Panic selling is a large-scale selling of an investment that causes a sharp decline in prices. Specifically, an investor wants to sell an investment with little regard to the price obtained. The sale is problematic because the investor is reacting ...
later. One's true
risk tolerance Risk appetite is the level of risk that an organization is prepared to accept in pursuit of its objectives, before action is deemed necessary to reduce the risk. It represents a balance between the potential benefits of innovation and the threats ...
can be hard to gauge until having experienced a real bear market with money invested in the market. Finding the proper balance is key. The tables show why asset allocation is important. It determines an investor's future return, as well as the
bear market A market trend is a perceived tendency of the financial markets to move in a particular direction over time. Analysts classify these trends as ''secular'' for long time-frames, ''primary'' for medium time-frames, and ''secondary'' for short time ...
burden that he or she will have to carry successfully to realize the returns.


Problems with asset allocation

There are various reasons why asset allocation fails to work. * Investor behavior is inherently
bias Bias is a disproportionate weight ''in favor of'' or ''against'' an idea or thing, usually in a way that is inaccurate, closed-minded, prejudicial, or unfair. Biases can be innate or learned. People may develop biases for or against an individ ...
ed. Even though investor chooses an asset allocation, implementation is a challenge. * Investors agree to asset allocation, but after some good returns, they decide that they really wanted more risk. * Investors agree to asset allocation, but after some bad returns, they decide that they really wanted less risk. * Investors' risk tolerance is not knowable ahead of time. * Security selection within asset classes will not necessarily produce a risk profile equal to the asset class. * The long-run behavior of asset classes does not guarantee their shorter-term behavior. * Different assets are subject to distinct tax treatments and regulatory considerations, which can make asset allocation decisions more complex. * Frequent asset class rebalancing and maintaining a diversified portfolio can lead to substantial costs and fees, which may reduce overall returns. * Accurately predicting the optimal times to invest in or sell out of various asset classes is difficult, and poor timing can adversely affect returns.


See also

*
Asset location Asset location (AL) is a term used in personal finance to refer to how investors distribute their investments across savings vehicles including taxable accounts, tax-exempt accounts (e.g., TFSA, Roth IRA, ISAs, TESSAs), tax-deferred accounts (e.g ...
*
Economic capital In finance, mainly for financial services firms, economic capital (ecap) is the amount of risk capital, assessed on a realistic basis, which a firm requires to cover the risks that it is running or collecting as a going concern, such as market ...
*
Efficient-market hypothesis The efficient-market hypothesis (EMH) is a hypothesis in financial economics that states that asset prices reflect all available information. A direct implication is that it is impossible to "beat the market" consistently on a risk-adjusted basis ...
*
Performance attribution Performance attribution, or investment performance attribution is a set of techniques that performance analysts use to explain why a portfolio's performance differed from the benchmark. This difference between the portfolio return and the benchm ...
*


References


Further reading

* Ibbotson, R. G. (2010) ‘The Importance of Asset Allocation’, Financial Analysts Journal, 66(2), pp. 18–20. . * * * * Perold, Andre F., and William F. Sharpe. 1988. “Dynamic Strategies for Asset Allocation.” Financial Analysts Journal 44 (1): 16–27. . * Hensel, C. R., Ezra, D. D. and Ilkiw, J. H. (1991) ‘The Importance of the Asset Allocation Decision’, Financial Analysts Journal, 47(4), pp. 65–72. . * Tütüncü, R., Koenig, M. Robust Asset Allocation. Ann Oper Res 132, 157–187 (2004). * * Richard O. Michaud, Tongshu Ma, Efficient Asset Management: A Practical Guide to Stock Portfolio Optimization and Asset Allocation., The Review of Financial Studies, Volume 14, Issue 3, 1 July 2001, Pages 901–904, * Jacquier, E. and Marcus, A. J. (2001) ‘Asset Allocation Models and Market Volatility’, Financial Analysts Journal, 57(2), pp. 16–30. . * Welsch , R. E. and Zhou , X. (2007) “Application of Robust Statistics to Asset Allocation Models”, REVSTAT-Statistical Journal, 5(1), pp. 97–114. . * Kaplan, P.D. (2012). Asset-Allocation Models Using the Markowitz Approach. In Frontiers of Modern Asset Allocation, P.D. Kaplan (Ed.). * * * Blake, David, Bruce N. Lehmann, and Allan Timmermann. “Asset Allocation Dynamics and Pension Fund Performance.” The Journal of Business 72, no. 4 (1999): 429–61. . * Bajeux‐Besnainou, Isabelle, James V. Jordan, and Roland Portait. “Dynamic Asset Allocation for Stocks, Bonds, and Cash.” The Journal of Business 76, no. 2 (2003): 263–87. . * Comer, George. “Hybrid Mutual Funds and Market Timing Performance.” The Journal of Business, vol. 79, no. 2, 2006, pp. 771–97. JSTOR, . Accessed 10 Apr. 2025. * Handa, Puneet, and Ashish Tiwari. “Does Stock Return Predictability Imply Improved Asset Allocation and Performance? Evidence from the U.S. Stock Market (1954–2002).” The Journal of Business 79, no. 5 (2006): 2423–68. . * Gerard, Bruno, and Guojun Wu. “How Important Is Intertemporal Risk for Asset Allocation?” The Journal of Business 79, no. 4 (2006): 2203–41. . * * * * * * Markowitz, H. M. (1952). Portfolio Selection. The Journal of Finance, 7 (1), 77–91. * Sharpe, W. F. (1964). Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk. The Journal of Finance, 19 (3), 425–442. * Brinson, G. P., Hood, L. R., & Beebower, G. L. (1986). Determinants of Portfolio Performance. Financial Analysts Journal, 42 (4), 39–44. * Black, F., & Litterman, R. (1992). Global Portfolio Optimization. Financial Analysts Journal, 48 (5), 28–43. * Wachter, J. A. (2010). Asset Allocation. Annual Review of Financial Economics, 2, 175–206. * Kinlaw, W., Kritzman, M. P., Turkington, D., & Markowitz, H. M. (2021). Asset Allocation: From Theory to Practice and Beyond. Wiley. * Faber, M. T. (2015). Global Asset Allocation: A Survey of the World's Top Asset Allocation Strategies. Mebane Faber. * Fabozzi, F. J., Kolm, P. N., Pachamanova, D. A., & Focardi, S. M. (2007). Robust Portfolio Optimization and Management. Wiley. * Elton, E. J., & Gruber, M. J. (2007). Modern Portfolio Theory and Investment Analysis (7th ed.). John Wiley & Sons. * Faber, M. T., & Richardson, E. W. (2011). The Ivy Portfolio: How to Invest Like the Top Endowments and Avoid Bear Markets. Wiley. * * * * * * * * * *


External links


Asset allocation performance

Model portfolios for buy and hold index investors


* ttps://web.archive.org/web/20161013080459/http://sporkforge.com/finance/asset_alloc.php Calculator which determines future asset mix based on differing growth rates and contributions
Is 60/40 dead? An asset allocation method hits hard times
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Encyclopædia Britannica The is a general knowledge, general-knowledge English-language encyclopaedia. It has been published by Encyclopædia Britannica, Inc. since 1768, although the company has changed ownership seven times. The 2010 version of the 15th edition, ...
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Is it time to rebalance your retirement portfolio?
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Portfolio diversification: What investors need to know
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What investment types can I use to build a diversified portfolio?
at ''Encyclopædia Britannica'' {{DEFAULTSORT:Asset Allocation Investment management Actuarial science Corporate development