What is asset allocation?
Asset allocation — the golden term in wealth management. Personally, I manage it through my wonderful excel file and I have to say — my 20 year old self sitting in an investment management class would be proud of it.
Asset allocation is a strategy to ensure that your portfolio has a healthy mix of investments across different asset classes that have different risk levels and return profiles. You want to ensure that you have different types of investments, with different risk levels and correlations to each other.
You do this for the overall health of your portfolio and to mitigate any major disruptions to it (severe losses for example).
Let’s take an analogy.
Think about your diet. Even though we all eat unhealthy from time to time, we know that it’s important to have a balanced diet. **We know that different foods will impact us differently and if we have too much of one thing (like sugar or carbs or fats), it can be problematic. In fact, sometimes when I come back a holiday where I’ve been eating and chilling the whole time, I’ll reel it in for a couple of weeks; get super healthy.
Generally, most of our diets contain a mix of different macros like carbs, proteins, fats (good & bad), and a mix of vitamins and minerals that our body needs. For those of us that want to extend our lives as much as possible, we get even healthier. You can eat superfoods, or whatever health trend Huberman might be talking about that week. It’s about managing the risk of different foods and the impact they have on our health.
That’s exactly what asset allocation is about, but for our investments. You can think of crypto meme coins like a cinnamon roll. It can taste really really good but you know that there is a high probability it will destroy your heart (i.e. portfolio). Maybe you’ll get lucky and it won’t. It depends on the risk you are willing to take.
If you’re thinking this is like diversification, right? You’re right, it is. Diversification is a core component of an asset allocation strategy.
I’ll do a full series on how to do asset allocation. Stay tuned.