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What Does

Asset Allocation

Mean?

An investment strategy that aims to balance risk and reward by apportioning a portfolio's assetsaccording to an individual's goals, risk tolerance and investment horizon.The three main asset classes - equities, fixed-income, and cash and equivalents - have differentlevels of risk and return, so each will behave differently over time.

Investopedia explains

Asset Allocation

There is no simple formula that can find the right asset allocation for every individual. However,the consensus among most financial professionals is that asset allocation is one of the mostimportant decisions that investors make. In other words, your selection of individual securities issecondary to the way you allocate your investment in stocks, bonds, and cash and equivalents,which will be the principal determinants of your investment results.Asset-allocation mutual funds, also known as life-cycle, or target-date, funds, are an attempt toprovide investors with portfolio structures that address an investor's age, risk appetite andinvestment objectives with an appropriate apportionment of asset classes. However, critics of thisapproach point out that arriving at a standardized solution for allocating portfolio assets isproblematic because individual investors require individual solutionsA portfolio strategy that involves periodically rebalancing the portfolio in order to maintain a long-term goal for asset allocation.

Investopedia explains

Strategic Asset Allocation

At the inception of the portfolio, a "base policy mix" is established based on expected returns.Because the value of assets can change given market conditions, the portfolio constantly needsto be re-adjusted to meet the policy

What Does

Tactical Asset Allocation - TAA

Mean?

An active management portfolio strategy that rebalances the percentage of assets held in variouscategories in order to take advantage of market pricing anomalies or strong market sectors.

Investopedia explains

Tactical Asset Allocation - TAA

This strategy allows portfolio managers to create extra value by taking advantage of certainsituations in the marketplace. It is as a moderately active strategy since managers return to theportfolio's original strategic asset mix when desired short-term profits are achieved

Asset allocation

is the strategy an investor uses to distribute his or her investmentsamong various classes of investment vehicles (e.g., stocksand bonds). A large part of financial planningis finding an asset allocation that is appropriate for a given person in terms of their appetite for and ability to shoulder risk. This can depend onvarious factors; seeinvestor profileAsset allocation is based on the idea that in different years a different asset is the best- performing one. It is difficult to predict which asset will perform best in a given year.Thus, although it is psychically appealing to try to predict the "best" asset, proponents of asset allocation consider it risky. They say that someone who "jumps" from the one assetto another, according to whim, may easily end up with worse results than any consistent plan.A fundamental justification for asset allocation is the notion that different asset classesoffer returns that are not perfectlycorrelated, hencediversification reduces the overall risk in terms of the variability of returns for a given level of expected return. Therefore having a mixture of asset classes is more likely to meet the investor's goals.In this respect, diversification has been described as "the only free lunch you will find inthe investment game." Academic research has painstakingly explained the importance of asset allocation and the problems of active management (see academicssection, below). This explains the steadily rising popularity of passive investment styles usingindexfunds.Although risk is reduced as long as correlations are not perfect, it is typically forecast(wholly or in part) based on statistical relationships (like correlation and variance) thatexisted over some historical period. Expectations for return are often derived in the sameway.When such backward-looking approaches are used to forecast forward-looking inputs for return or risk in the traditional mean-variance optimization approach to asset allocation(MVO being the central tenet of Modern Portfolio Theory), the strategy may merely windup expressing expecations for risk and return in historical terms. As there is no guaranteethat past relationships will continue in the future, this is one of the "weak links" intraditional asset allocation strategies as derived from MPT. Other, more subtleweaknesses include the " butterfly effect," by which seemingly minor errors in forecasting lead to recommended allocations that are grossly skewed from investment mandatesand/or impractical -- often even violating an investment manager's "common sense"understanding of a tenable portfolio-allocation strategy.

[edit] Examples of asset classes

Wikibookshas more on the topic of

Asset allocation

•

cash (i.e.,money marketaccounts)

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Bonds: investment grade or junk (high yield); government or corporate; short-term, intermediate, long-term; domestic, foreign, emerging markets

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stocks: value or growth; large-cap versus small-cap; domestic, foreign, emergingmarkets

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real estate

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foreigncurrency

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natural resources

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precious metals

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luxury collectables such as art, fine wine and automobilesTo further break down equity investments into additional asset classes consider thefollowing:

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Bysize:Large-CapMid-CapSmall-Cap

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By style:GrowthBlendValue

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REITs

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International Investments: foreign or emerging markets

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Life settlements Note that 'funds' are not an asset class; funds are filed under what they own, e.g.stocksfor stock funds, bondsfor bond funds