Asset Allocation

There are five major asset classes, equities, bonds(fixed income), commodities, cash(and equivalents) and real estate. Asset allocation attempts to optimize returns by spreading an investor’s investments across various asset classes by taking into consideration his/her personal goals, risk tolerance and so on.

Asset allocation is heavily emphasized by many financial professionals. However, an asset class that may seem attractive due to its historical returns may not be a good investment in the future. This is known as, “past performance is not indicative of future results.” Gold has been in a bull market from 2001 till now, but the price has hardly gained in comparison with its 1981 high. Therefore an investor must be careful not to allocate his assets to investments solely because they are in vogue or have had strong price performance in recent years.

Related Terms

Popular Articles