Asset Allocation

Asset allocation is deciding how to split money across asset classes — equities, bonds, cash, property. It sits above stock picking as the larger decision that has to be made first.

Research consistently shows that most long-run return comes from this split rather than from selecting individual securities. The ratio between stocks and bonds shapes the outcome more than which stocks you chose.

A common starting point is holding your age subtracted from 100 in equities: 70% at thirty, 40% at sixty. It is not a rule so much as a reference line for calibrating.

The essence is combining assets that move differently. If bonds rise while stocks fall, total volatility drops. Holding many things that move together adds names without adding any allocation benefit. And whatever split you choose drifts on its own over time, so allocation needs rebalancing roughly once a year to stay what you decided.