Key Terms
Asset allocation
The division of a portfolio between broad asset types such as shares, bonds, cash and property, expressed as proportions of the whole.
By the Investfora Research Desk
Asset allocation is the way a portfolio is divided between broad types of asset — shares, bonds, cash, property and so on — expressed as proportions of the whole. It describes the split, not the individual holdings: an allocation states how much sits in each category, whatever specific securities fill them. Because different asset types tend to behave differently, the allocation is one of the main determinants of how the portfolio as a whole behaves. The split also shifts of its own accord as prices move.
A worked example
Imagine a hypothetical £20,000 portfolio allocated 50 per cent to shares (£10,000), 30 per cent to bonds (£6,000), 15 per cent to cash (£3,000) and 5 per cent to property (£1,000). If the shares rise 10 per cent to £11,000 while everything else is unchanged, the portfolio grows to £21,000 — and the share allocation drifts from 50 per cent to roughly 52.4 per cent without a single trade being made.
An allocation is a description, not a verdict. It does not say which split suits a given investor, how the categories will behave, or what sits inside each one; identical allocations can contain very different holdings.