What is asset allocation?

Asset (investment) types

The main asset types are:

• Shares
• Bonds
• Property
• Alternatives (most typically infrastructure and commodities, such as gold)
• Cash

What is asset allocation?

Asset allocation is a breakdown of your overall portfolio by investment type.  For example, you may have 60% in shares, 30% in bonds and 10% in alternatives. 

A balanced investment portfolio should contain a mix of asset (investment) types, but what percentage of your portfolio should each account for?

This in part depends on the kind of investor you are, your personal circumstances, objectives, needs and attitude to risk.

Someone who is cautious is likely to have a smaller amount of exposure to shares. Whereas, someone who has a high tolerance for risk will be more comfortable having a much higher percentage to shares. 

The length of your investment horizon plays a key part. If you are young and saving towards your retirement in 30 years’ time you have plenty of time on your side to mostly invest in shares. Whereas, if you are in retirement and drawing an income from your investments a spread of investment types will help to reduce risk. 

Drilling down further

All investors are different, and as with everything, there are personal preferences that come into play when undertaking investment portfolio management. For example, in the shares segment of your portfolio, how much should be held in large companies, medium-sized companies, or smaller companies? Similarly, should they be focused on dividends (income) or more growth-orientated? Finally, should they be UK companies or overseas?

Rebalancing your assets

You should make a point to regularly review and rebalance the asset allocation in your portfolio, as not doing so can lead to distortions in the level of risk taken, which will impact returns over time.

• Golden rules for ISA investors: Review your investments twice a year 

Multi-asset fund options

One option rather than building a portfolio yourself is to outsource the asset allocation decision-making to a multi-asset fund. 

Such funds invest in a mixture of asset (investment) types. Some have a low amount of exposure to shares, while others have the majority of the fund invested in shares.  

interactive investor’s Super 60 list includes Capital Gearing, which adopts a cautious approach. The fund has around 50% in shares/funds, 30% in bonds and the remaining 20% in alternatives (both infrastructure and gold) and cash.

Our Super 60 list also includes Vanguard LifeStrategy 80% Equity, which is higher risk due to having a larger slice of its assets in shares. The remaining 20% is invested in bonds.