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Asset allocation - the basics

Asset allocation is an important process that you’ll need to think about as you build your investment portfolio. Your ‘assets’ are the things you’re investing in – the ‘allocation’ part means how much of each type of investment you put into your portfolio.

The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek independent advice.

What you’ll learn:

  • Why it’s generally better to invest in more assets than just a few.
  • Getting your asset allocation right.
  • When you should review your asset choices.

Learn in 10 – Asset allocation

Short on time? Watch this quick 10 second video on Asset allocation.

There are lots of different types of asset but most people spread their money among the four main asset classes. These are shares, fixed-income securities (bonds and gilts), property and cash.

It’s up to you how much you invest and where you put it, but it’s generally a good idea to spread your money across these different types of asset. This is known as diversification and the idea is to help spread your risk and lessen the potential for losses. If you put all your money in one type of asset and it drops in value your losses will be substantial. If you invest in several different assets, then there’s more chance that good performance in some will make up for bad performance in others. Of course, it’s not impossible for the main asset classes to lose value all at the same time, but it’s less likely.

If you’ve not got up to speed on diversifying your portfolio yet, there’s an article on Diversifying your investments.

To really get the most out of your asset allocation, you’d ideally have your money divided among assets that behave differently to each other – that is, their value doesn’t tend to move in the same way, be that up or down, at the same time.

Getting your asset allocation right

Where you put your money will ultimately depend on your investment goals and the kinds of returns you’ll need to achieve them. It’ll also depend on how much risk you’re comfortable with and how much you could afford to lose if things go badly.

If you’re comfortable with more risk and you want as much growth as possible, you might have a portfolio that’s heavier in shares. If you’re looking for income, more bonds and gilts could be the way to go. By combining them you could get a bit of both. Keeping a proportion in cash is wise, too, as it’s always useful to have funds available which you can access quickly.

Changing your asset allocation

Unless you’re a very experienced investor, it’s generally not a good idea to tinker with your portfolio too much. Once you’ve built a portfolio that suits your needs, it’s often best to leave it alone to grow as much as possible.

That said, you should monitor your investments regularly to make sure you’re still on track to meet your goals. Over time your asset allocation could change simply because some assets do better than others and end up taking up a larger part of your portfolio.

You might decide that 60% of your portfolio should be invested in shares. It may be that after a recent stock market increase, they now actually account for 80% of your portfolio. It’s good that they’ve gained value, but the asset allocation you’ve now got may no longer be appropriate for what you’re trying to do. Therefore, you may need to adjust your allocation from time to time. It’s called rebalancing. You may also need to review your portfolio if your financial goals or your investment time frame changes.

What to do next

Working out what your asset allocation should be is a key step and it’s important to make sure it’s in line with the goals you’ve set for yourself. If you’re just starting out, or you think you need a bit more guidance, you might want to speak to a professional financial adviser before proceeding.

The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek independent advice.

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