Asset Allocation refers to methods and guidelines for diversification of an investment portfolio.

Most people would agree that flying in an airplane involves some risk but skydiving is probably riskier. However, for a skydiver willing to take the risk the return in investment (jumping out vs. safely staying in the plane) is usually worth the added risk. Diversifying a financial portfolio can be seen as analogous to a skydiver–stay in the safe plane or brave the heights and soar. However, our skydiver is just one person.


Most portfolios are comprised of more than one “skydiver” or asset. Far from being a random selection, an effective asset allocation process groups similar investments together into asset classes, the better to track investment return progress of each group. As different investments provide a different Return-to-Risk ratio, comparing a low-return, low risk mutual fund with a high-risk, high-possible-return tech stock would be difficult, as they would grow (or devalue) at different rates.

The tech stock would tend to vary more as well throwing off any tracking curve imposed upon it. The more similar the investments, the more likely they will be to perform similarly within an expected range, of course, usually providing similar risk and return.

An effective fund manager uses many different methods to describe and forecast trends and investing opportunities, distributing funds and assets where they show the best prospects for improvement. Age is frequently a factor, as younger investors can often afford to risk more, while older investors are usually more interested in capital maintenance, protecting their investments from decline, rather than seeking higher returns with greater risk.

However, an advantage an older investor may have with a mature portfolio is a little leeway to invest a small fraction of the capital in higher-risk stocks, having the majority of the fund to fall back on if the stock performs poorly. With careful analysis and allocation of funds and assets an effective manager can ensure a worthwhile return on capital and assets invested.

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