Asset allocation is a term used in the investment industry, but what actually is it? Why is it important? How do Warwick clients benefit from it through our value proposition? Asset allocation is the process whereby the funds available for investment are allocated between the major categories or asset classes available to the investor. These asset classes can be broadly categorised as stocks, property, fixed income (bonds and cash instruments) and offshore assets. By going through this process, the investor ends up with an investment portfolio divided between the abovementioned asset classes and this would the resultant asset allocation of the portfolio. There are a number of reasons why asset allocation is key to the management of an investment portfolio. The most important is risk mitigation. Asset allocation helps reduce risk/volatility through diversification. As the saying goes, “the only free lunch in investing is diversification”. All the asset classes have different risk-return profiles and they also perform differently from each other under different economic conditions. By diversifying a portfolio between asset classes, you mitigate the risk of being only invested in an underperforming asset class given, particularly the current economic environment. The ideal asset allocation for a given investor is […]
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