Asset allocation

The process of deciding in which sorts of assets to make investments and what proportion of total capital available should be allocated to each choice. The task is as relevant to private investors as it is to giant savings institutions. The latter formalize the process rather more, however, often beginning with a top-down approach, which decides both in which asset classes to make investments (shares, bonds, real estate, cash, other classes) and in which geographical areas to invest (North America, Europe, East Asia, emerging markets, for example). Estimates of the likely returns from individual investment choices compared with the target return that the institution seeks will drive the selection process. From this will follow the decision to invest an above-average or below-average proportion of funds in some markets with reference to benchmark weightings that are commercially available.