Asset allocation, a term used throughout the financial services industry, describes the decision distribution of a client’s money and owned assets by geographical region, sector or type of security taking into account the client’s goals, how long they want to invest for and how tolerant they are of risk.
Several building blocks typically make up a client’s portfolio of assets: these include listed (stock market) equities, bonds, cash, real estate, various commodities (for example gold or oil), private equity and also subdivisions of these classes, for example high-growth equities, Emerging Market bonds or stocks in the US or UK markets paying out high income (dividends). These asset class blocks all have varying return and risk (of loss) characteristics and will behave differently in reaction to future events. A client may have requirements for income (cash paid out to the client on a regular basis) or a specific end time objective portfolio liquidation, or “selling everything”. In both these very common cases, the asset building blocks can be fitted together in a way to make sure that the maximum return is achieved whilst taking the minimum risk of money being lost. A skilled asset allocator is able to re-shape, or re-balance, the client’s portfolio of assets by trimming some blocks that have grown and buying others which might have shrunk. They also take into account how the prices of the blocks move in relation to each other (“correlation) and how easy they are to sell (“liquidity”). A solid foundation of blocks gives the client a “diversified” portfolio.
Mark Robinson, EnCor Wealth management
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