Asset allocation

Asset allocation is the decision about how you spread your money across different asset classes.

The asset classes:

• Shares/ETFs: highest return (7–9%), highest risk
• Bonds: moderate return (2–5%), medium risk
• Property: moderate return (3–5%), illiquid
• Cash/overnight money: lowest return (1–3%), highest safety
• Commodities/gold: inflation protection (3–5%), no ongoing income

Why it's the most important decision:

Studies (Brinson, Hood, Beebower 1986) show: over 90% of the differences in returns between portfolios are explained by asset allocation – not by picking individual shares or by timing.

Simple rules of thumb:

• Equity share = 100 − your age (conservative: 110 or 120 − age)
• At 25: 75–95% shares (long horizon, sit out fluctuations)
• At 50: 50–70% shares (less time, more safety)
• At 65: 30–50% shares (withdrawal phase, a buffer is important)