Asset Allocation

Asset allocation

We have already talked about the ‘building block’ nature of iShares ETFs and how they represent a simple and cost-efficient way to spread your investment across several asset classes.

Asset allocation is the term which refers to how you choose to divide up your investment portfolio among the major asset classes - stocks, bonds, and cash. We can also refer to asset allocation within asset classes - for example, within stocks we have a choice of region (UK, US, Europe etc), investment style (value or growth) or market capitalisation (large-cap or small cap). Many investors believe that the allocation of investments across asset classes is more important than which securities are owned within that asset class.

The decision of which asset classes to invest in, and in what proportion, will depend on your risk and return objectives and also your time horizon. Investors with longer time horizons will often tilt their portfolios toward ‘riskier’ asset classes with higher historical returns (such as small-cap or alternatives), expecting that the risk of the asset class will average out over time.

A critical component of asset allocation is ensuring appropriate diversification, or making sure that you haven’t ‘put all your eggs in one basket’. iShares range of ETFs help you to ensure your investments are spread over as many asset classes as you feel are appropriate for your investment needs.

To show how this works, we now need to take a look at the investment concept of correlation.