Definition
Asset allocation is the single most important investment decision, explaining over 90% of portfolio return variation according to Brinson et al. (1986). Strategic asset allocation sets long-term targets (60/40 stocks/bonds). Tactical asset allocation adjusts weights based on market conditions. The right allocation depends on an investor's goals, risk tolerance, time horizon, and financial situation.
lightbulb Example
A 35-year-old investor targets 80% equities (50% domestic, 20% international, 10% emerging), 15% bonds, 5% alternatives. At age 55, the allocation shifts to 55% equities, 35% bonds, 10% alternatives to reduce risk as retirement nears.
verified_user Key Points
- Determines 90%+ of portfolio return variation
- Strategic = long-term targets; tactical = short-term adjustments
- More stocks for longer horizons; more bonds for shorter
- Regular rebalancing maintains target allocation