Next, an asset allocation strategy is devised. This will enable the portfolio to achieve the objectives for growth whilst limiting the risk its constituents attract. This aspect of the portfolio's construction is of paramount importance. The effectiveness of asset allocation is best demonstrated by its performance during the early stages of the 2008 financial crisis. Where other methodologies that tended to focus on assets that appeared destined for spectacular growth suffered heavy losses, our approach saw our clients insulated from the devastation wrought by the sharp correction in equities and other assets.
Asset allocation determines the percentage of your capital you invest in each of the varying types of securities. The actual combination of investments and the percentages invested therein are determined by your own individual risk tolerance, your financial objectives and your time horizon.
By and large, the percentages representing your asset allocation are determined by your risk tolerance, although the time horizon you have available in which to achieve your objectives and the level of return you want also plays a role.
If, for example, you have a high tolerance for risk, chances are that you might have a greater investment weighting in equities (stock, shares). This weighting could make a lot of money but there is also the risk that you could lose a lot. On the other hand, if you have a low tolerance for risk, there might be a greater bias toward investing in bonds (treasuries, municipal debt) which tend to grow at a slower rate than stocks but, then again, tend to preserve the wealth you already have.