Portfolio allocationasset allocation
Definition
Portfolio allocation is how your money is split between asset classes such as stocks, bonds and cash, and within them between regions, sectors and currencies.
Portfolio allocation (asset allocation) is how you split your money between asset classes: stocks, bonds, cash, commodities, real estate or crypto. Much research suggests that allocation, rather than picking individual companies, explains most of the variation in a portfolio’s results over time.
Levels of allocation
- Asset classes: e.g. 70% stocks, 25% bonds, 5% cash.
- Regions and countries: e.g. the US, Europe, Poland, emerging markets.
- Sectors: technology, financials, energy, healthcare.
- Currencies: the currency your assets are priced in.
What a good allocation depends on
There is no single right allocation. It depends on your time horizon, goals, liquidity needs and how well you tolerate declines. The longer the horizon and the higher your tolerance for swings, the larger the share of stocks can be. The closer you are to needing the money, the more bonds and cash matter.
Allocation drifts on its own: assets that grow faster take up an ever larger share of the portfolio. A 60/40 plan can turn into 75/25 after a few bull-market years and carry far more risk than you intended. That is why it is worth checking regularly and restoring it with rebalancing when needed.
Keep ETFs in mind: a single world-index fund can hold thousands of companies across many countries and sectors. The real allocation only becomes visible once ETFs are broken down into their holdings.
Related terms
All terms- Portfolio diversificationPortfolio diversification is spreading investments across many assets, sectors and regions, so a weak result in one of them does not decide the outcome of the whole.
- Portfolio rebalancingPortfolio rebalancing restores your target allocation after price moves shift the weights, e.g. by trimming what has grown or by directing new deposits.
- Portfolio exposurePortfolio exposure is what market factors you are actually exposed to: currencies, sectors, countries. For futures, it is measured by the notional value.
- Asset correlationAsset correlation measures how closely the returns of two investments move together. It ranges from −1 to 1 and is the foundation of effective diversification.