Investing fundamentals #3 – Focus on asset allocation
All too often when investing money, the focus is on selecting individual investment funds rather than the underlying asset allocation.
Asset allocation is the decision you make to invest money in one of the broad investment types – primarily cash, fixed interest securities (bonds), company shares (equities) or property. These are investment asset classes.
The mix you decide to invest in these, or how you ‘allocate’ across the various investment asset classes, represents your asset allocation decision.
Various academic studies have found that the asset allocation decisions made by investors tend to have a bigger impact on investment returns than fund or stock selection decisions.
This makes a lot of sense when you consider that funds within investment asset classes tend to behave in a similar fashion. For example, if the UK stockmarket is rising, then you would expect most of the funds which invest in the UK stockmarket to rise as well.
Some funds in an asset class will perform better than others, so fund selection is still an important part of investment success. What really counts though is your decision to invest in the various asset classes.
You can either make your own asset allocation decisions, selecting individual funds which each invest in a single asset class, or alternatively outsource this decision making process to a fund manager by investing in a multi-asset class fund.
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