Asset allocation is the distribution of capital across different investment categories to create a balance between risk and return. For individual investors, this means spreading your investment portfolio across various assets, such as cash, stocks, and bonds. An example of asset allocation is: 40% stocks, 50% bonds, and 10% cash. By diversifying your portfolio, you weigh the different risks against the achievable returns. This way, you can achieve a good return at a risk level that is acceptable to you. Asset allocation depends on several factors, namely your investment horizon, historical and expected returns, the risks, and your goals.

Why apply asset allocation?

Approximately 80% of all investment returns are determined by asset allocation. By responding to price movements while considering your risk profile, you can achieve the return that matches your goal. The time period over which you invest plays an important role here. As a general rule: the longer your investment horizon, the more return you need to achieve your goals. For example, do you want to use asset allocation for your retirement in 30 years? Then you need a different strategy than if you want to achieve returns within a month. Want to achieve a 7% return? Then it's important to carefully consider which allocation you choose. You'll never achieve a 7% return by putting all your money in a savings account. The distribution of your assets across different investment categories largely determines your return.

Asset allocation and volatility

Due to the volatility of the financial markets, it's important to choose the right asset allocation. The distribution of assets is decisive for the expected return and risk. Asset allocation is the most important factor in constructing your investment portfolio. Because the price of an investment product is constantly evolving, the price continuously moves up or down. This price movement indicates how volatile the asset in question is. The shares of an established company with a stable price, for example, have low movement, meaning low volatility. For new, small companies where speculation plays a larger role, the opposite is true. Share prices can fluctuate enormously. When creating an asset allocation, you as an investor look at the company's volatility and the risk you're willing to take.

Asset allocation breakdown

Your portfolio allocation falls within a certain risk profile. A distinction is made between:

  • Defensive
  • Neutral
  • Offensive

In the different risk profiles, the allocation between stocks and bonds is central. Stocks have higher price movement - volatility - than bonds. This makes investing in stocks riskier than investing in bonds. However, the expected return on stocks is higher than the expected return on bonds. This makes stocks an attractive form of investing. Because stocks carry higher risk, an asset allocation with predominantly stocks is considered an offensive risk profile. This risk profile shows higher returns with the corresponding higher risk. An asset allocation with lower risk is called a defensive risk profile. This risk profile is characterized by an emphasis on bonds. Due to the lower volatility of bonds, the risk is considerably lower than stocks. As a result, the expected return is also lower. A defensive risk profile therefore emphasizes bonds. In a neutral risk profile, there is more balance between the amount of stocks and bonds, with the allocation consisting of roughly equal percentages of stocks and bonds.

Determining your asset allocation

The ideal asset allocation depends entirely on your personal situation. Do you enjoy taking big risks and don't lose sleep over price fluctuations? Then you can choose an asset allocation with predominantly stocks. But would you rather be more cautious? And don't want to take too much risk? Then a defensive asset allocation with primarily bonds is your best option. As mentioned earlier, you determine the right asset allocation based on:

  • The return you want to achieve
  • Your risk tolerance
  • Your investment horizon
  • Your investment goals