A beginner’s guide to asset allocation

Deciding where to invest your money is a challenge. There are so many different factors to consider that it can all seem very daunting.

“What do you want to be invested in?”

“Is it better to be focused or diversified?”

“Where should you avoid completely?”

All these questions will be answered during what is known as the asset allocation phase. Here we explain what this means, the way in which it works, and how to make such calls.

What is asset allocation?

As its name suggests, this is deciding where you want to be invested. It’s the next step after you’ve decided your investment goals and overall attitude to risk.

The purpose of this stage is working out the various exposures you’d like to have in your overall portfolio and how much of your money each will receive.

For example, are you looking to buy a number of individual company shares or opting for an investment fund whose manager will make decisions on your behalf?

Assets to consider

There are a number of different assets that you can hold. Which ones are most suitable for your needs will depend on your personal circumstances and attitude to risk. Here are three of the main asset classes.

Equities: Arguably the most well-known asset class is equities. These are shares in companies that are traded on global stock markets. This means you’re buying an actual stake in the business and will benefit – or suffer – depending on what happens to the share price.

Bonds: Then there are fixed income investments, known as bonds. These involve you loaning money to a government or company in exchange for a fixed rate of interest for a pre-set period. You will also receive the face value of the investment back on a specified future date. The safest bonds are those issued by stable international governments. In the UK, they’re known as Gilts.

Property: Another popular asset class over recent years has been commercial property. Bricks and mortar commercial property involves buying actual properties that can be rented out to provide an income. It’s also hoped the buildings themselves will increase in value.

While buying a shopping centre is out of reach for most investors, specialist investment funds and trusts can give you exposure to the benefits of such properties.

Ways to get exposure

It’s possible to buy individual equities and bonds. You can decide to have just one – or get exposure to a whole variety. Another option is an investment fund. These funds – either unit trusts or investment trusts – pool the money from thousands of investors and use it to buy a variety of assets. These are then run by a dedicated fund manager.

As far as commercial property is concerned, this will be pretty much the only route – unless you have a spare couple of million pounds.


Your next task is deciding which type of assets you want to hold. For example, do you want to concentrate solely on equities, or do you prefer having a mix? Do you have strong feelings where you want to be invested? If not, then it’s probably worth taking a more diversified approach with your asset allocation. This means you have a spread of asset exposures in the hope that should one area fail to perform, another will be delivering as expected.

While you may miss out should one asset suddenly boom – and you’ve split your allocation across different areas – being diversified can help safeguard your overall portfolio.

Income or growth?

The next step is making allocation calls within the various assets. Let’s take equities as an example and highlight what you need to consider.

There are many types of equity funds available, each with their own aims. For example, are you wanting it to generate an income or are you more concerned with growing the capital?

As a general rule, income funds tend to buy into stable, dividend-paying stocks, while growth firms concentrate on those looking to expand their operations.

Geographic allocation

Then you’ll need to decide whether you just want exposure to UK-listed companies or prefer those based around the world. This is your geographic allocation. Factors to bear in mind include political or economic issues that could affect returns.

There are funds that concentrate on individual markets, such as the UK, China, and North America, as well as global portfolios that have exposure to a number of countries.

Company size

What type of companies would you like to invest in? For example, do you feel more comfortable putting your money into global multinationals such as Apple? Or would you prefer to put your money into exciting, innovative young companies that are currently small but have the potential to be the Microsoft of tomorrow?

There are a wide variety of funds focusing on small, medium, and large companies. Many will be able to invest across the market spectrum, depending on where the manager sees opportunities.

Specialist portfolios

The fund management industry is continually coming up with innovative portfolio ideas to give investors greater choice over where to put their money.

There are funds focused on everything from environmental issues and financial companies to those benefitting from countries improving their infrastructure. More recently, portfolios have emerged that concentrate on the increasingly important technological developments that we’re seeing every year.

Let someone make the asset allocation decisions for you

If all of that sounds too daunting, you could consider investing in a fund that spreads your money across a number of asset classes and the manager adjusts these positions depending on the prevailing market environment. This type of fund is called a ‘multi-asset’ fund and there are plenty to choose from.

Research Elite Rated Multi-Asset funds here.


Photo by Nikolai Chernichenko on Unsplash

This article is provided for information only. The views of the author and any people quoted are their own and do not constitute financial advice. The content is not intended to be a personal recommendation to buy or sell any fund or trust, or to adopt a particular investment strategy. However, the knowledge that professional analysts have analysed a fund or trust in depth before assigning them a rating can be a valuable additional filter for anyone looking to make their own decisions. Past performance is not a reliable guide to future returns. Market and exchange-rate movements may cause the value of investments to go down as well as up. Yields will fluctuate and so income from investments is variable and not guaranteed. You may not get back the amount originally invested. Tax treatment depends of your individual circumstances and may be subject to change in the future. If you are unsure about the suitability of any investment you should seek professional advice. Whilst FundCalibre provides product information, guidance and fund research we cannot know which of these products or funds, if any, are suitable for your particular circumstances and must leave that judgement to you. Before you make any investment decision, make sure you’re comfortable and fully understand the risks. Further information can be found on Elite Rated funds by simply clicking on the name highlighted in the article.