A proper asset allocation is the most important aspect of any investment portfolio. Research has demonstrated that a good asset allocation is crucial to long-term success in any investment portfolio.

What is asset allocation?

Asset allocation basically means how you allocate your investments among different asset classes. Asset allocation is the way you divide your investments among different asset classes (e.g., cash, bond and property, share, etc. A lower allocation may be available for more risky assets such as shares. However, a younger investor might prefer a higher allocation.

Why is it so important?

Different asset classes react differently in response to changes in market and economic conditions. Having an appropriate asset allocation can help manage fluctuations in financial markets.

An example of an investment portfolio is Portfolio A. Portfolio A with a higher cash allocation (e.g. Portfolio A) with a higher cash allocation (e.g. A portfolio with a higher share allocation (e.g. 20%) will perform better in poor market conditions than a portfolio that has more shares. However, Portfolio A will perform worse than a portfolio with 100% shares in a bull run (or good share markets conditions).

How do you determine the best asset allocation?

This question is not definitive. The best asset allocation depends on many factors, including:

How much can you accept of uncertainty and risks?
How long do you plan to invest your money?
Consider your individual situation. How much financial responsibility do you have for the future?
The rule of thumb is that the higher your tolerance for risk and the shorter the investment time horizon, then the smaller your allocation in risky assets like shares and property should be.

How do you determine the best asset allocation?

This question is not definitive. The best asset allocation depends on many factors, including:

  • How much can you accept of uncertainty and risks?
  • How long do you plan to invest your money?
  • Consider your individual situation. How much financial responsibility do you have for the future?
  • The rule of thumb is that the higher your tolerance for risk and the shorter the investment time horizon, then the smaller your allocation in risky assets like shares and property should be.

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