Core Principles of Asset Allocation

Asset allocation is the most critical factor in investment success, accounting for more than 90% of long-term portfolio performance. By building the right asset allocation strategy, you can manage risk while maximizing returns.

1. Why Asset Allocation Matters

The distribution of assets across different asset classes has a far greater impact on long-term returns than the selection of individual securities. This is the cornerstone of Modern Portfolio Theory, which earned its creators the Nobel Prize in Economics.

2. Asset Allocation by Age

Traditional rule: Stock allocation = 100 minus your age Modern approach: With longer life expectancy, use 120 minus your age In your 20s: 80–90% stocks In your 40s: 60–70% stocks In your 60s: 40–50% stocks

3. Characteristics of Each Asset Class

Stocks: High return potential, high volatility Bonds: Stable income, low volatility Real estate: Inflation hedge, steady cash flow Commodities: Inflation hedge, portfolio diversification Cash: Safety, liquidity for opportunities

4. Considering Correlation

Combining assets that move differently from one another reduces overall portfolio volatility. Stocks and bonds have traditionally exhibited a negative correlation, making them effective complements in a balanced portfolio.