What asset allocation means
"Asset allocation" refers to spreading capital across multiple different asset categories rather than concentrating it in a single one. A common way to group assets is:
- Stocks: equity ownership in companies
- Bonds: debt claims on governments or corporations
- Real-estate-linked assets (REITs): securitized products that hold rental-income-producing real estate
- Cash and cash equivalents: demand deposits, time deposits, and money-market instruments
Why spread across categories
Each category has different drivers of volatility. Stocks are sensitive to corporate earnings, bonds to interest rates, real estate to both rents and rates, while cash is relatively stable but gets eroded by inflation. Because categories don't move in perfect sync at the same time, spreading capital across them usually leaves the overall portfolio with lower volatility than any single category alone.
Asset allocation isn't the same as picking securities
Asset allocation decides what percentage each category holds, not which specific ticker to buy. For example, "stocks 60%, bonds 30%, REITs 5%, cash 5%" is an asset-allocation-level decision.
How you actually pick a product within a given category is a separate question — it involves fees, liquidity, tracking error, FX, taxes, and more. This article series does not cover specific products.
Common ways people decide the percentages
Methods commonly cited in public literature include:
- Age-based rules: use age as the main input, e.g. "stock percentage ≈ 110 − age"
- Risk-tolerance questionnaires: adjust based on how much volatility you can accept
- Goal-based: work back from the purpose of the capital, the time horizon, and the required return
These are thinking tools, not optimal solutions. Everyone's income stability, living expenses, tax situation, and family circumstances differ, so the actual ratio still depends on your individual situation.