How an investment portfolio is divided between asset classes such as shares, bonds, property and cash, chosen to fit the investor's time horizon and capacity to bear losses; it sets the portfolio's broad risk and return profile before any individual holding is picked.
Our take. The split between asset classes exists whether or not an investor decides it on purpose: a portfolio assembled one tip at a time still has an allocation, just not a chosen one. An allocation is a policy rather than a forecast, and its value comes from holding to it and rebalancing when markets pull it out of shape. Changing it because of last quarter's news is market timing under another name.
The SEC's investor education pages tie the choice to two personal facts: how long until the money is needed, and how much loss the investor can tolerate, financially and emotionally, without abandoning the plan. A long horizon can sit through several downturns and so can hold more of the volatile classes; a short one cannot wait for a recovery. Each class answers a different need: shares for growth, with larger swings; bonds for income and generally steadier values; cash for liquidity, with inflation as its cost. The mix of the three, plus anything else the investor holds, decides most of how the portfolio will feel in a bad year.
Keeping the mix on target
Rebalancing is the uncomfortable step, because it means selling what has done well and buying what has lagged. It is also what stops the risk an investor chose from turning into a different risk nobody chose.
Set targets: a weight for each class and a tolerance band around it.
Spread inside each class: many issuers, sectors and regions rather than a handful of favourites.
Rebalance: restore the targets when drift leaves the band or on a fixed calendar; investor.gov notes that some advisers suggest doing it every six or twelve months.
Revisit when life changes: a shorter horizon or a new dependant justifies new targets, a poor quarter does not.
A rotating selection from the course directory, drawn from the subcategories where this concept is taught rather than picked for it. Details, price and the provider link are on the course page.
