Asset Allocation: How a Portfolio Is Divided
Asset allocation is how an investment portfolio is divided between broad groups of assets, such as shares, bonds and cash. It is one of the main drivers of how bumpy a portfolio's ride is likely to be. This guide explains the idea; it does not recommend any particular mix.
What asset allocation is
Asset allocation is the percentage of a portfolio held in each asset class. Different classes behave differently: shares can grow faster but fall further, bonds usually move less, and cash is stable but earns little.
Diversifying across classes aims to reduce the damage if one class performs badly. It does not remove risk, and classes can fall together in a market shock.
What shapes an allocation
- Time horizon. Money needed soon has less time to recover from a fall.
- Ability to bear loss. Your income stability and reserves decide how much of a fall you can absorb without selling.
- Willingness to bear loss. A mix you will abandon in a downturn is the wrong mix, however good it looks on paper.
- Goals. The return you need to reach a target sets a floor on how much risk may be required.
Drift and rebalancing
Assets grow at different rates, so the weights change. This is drift. Rebalancing means selling some of what has grown and buying what has lagged to return to the chosen weights. Some investors rebalance on a calendar schedule; others when a weight moves beyond a set band. Trading costs and taxes belong in the decision.
A worked example
This example is illustrative only and is not a recommended allocation. A portfolio of 10,000 starts at 60% shares, 30% bonds and 10% cash.
| Asset class | Start value | Start weight | After shares rise 20% | New weight |
|---|---|---|---|---|
| Shares | 6,000 | 60.0% | 7,200 | 64.3% |
| Bonds | 3,000 | 30.0% | 3,000 | 26.8% |
| Cash | 1,000 | 10.0% | 1,000 | 8.9% |
| Total | 10,000 | 100% | 11,200 | 100% |
To return to 60/30/10 on a total of 11,200, shares should be 6,720, bonds 3,360 and cash 1,120. That means selling 480 of shares, buying 360 of bonds and adding 120 to cash.
Common mistakes
- Chasing last year's winner. Past performance does not decide what comes next.
- Counting funds, not exposure. Several funds can hold the same underlying assets.
- Never reviewing. Drift can quietly make a portfolio riskier than intended.
- Ignoring the rest of your finances. Property, a business or an employer's shares are part of your total risk.
To see how long-term growth compounds under assumed returns, use the Compound Interest Calculator, and see how to track investment performance for measuring results.
Run the numbers
Project growth with the compound interest calculator → Also relevant: Investment Return Calculator.
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Educational estimates, not advice. Results depend on the assumptions you enter and are not predictions or personalised financial, investment, tax or legal advice. Read the financial disclaimer.