Asset Allocation and Diversification for Beginners
See how spreading money across asset classes can shape portfolio risk and why more funds is not always better.
Two related ideas
Asset allocation is the division of money among categories such as equity, debt and cash. Diversification spreads exposure within and across those categories.
The aim is not to eliminate every loss, but to avoid allowing one investment or type of risk to determine the entire outcome.
Your allocation is personal
A suitable mix depends on the goal, time horizon, income stability, emergency reserves and capacity to accept a fall in value. Copying another investor's allocation can produce the wrong risk level.
Overlap can hide concentration
Several funds may own many of the same companies or bonds. The number of schemes is therefore a poor measure of diversification by itself.
Rebalancing
Market movements can push a portfolio away from its intended mix. Rebalancing periodically restores the target allocation by redirecting new investments or buying and selling assets.
Before selling, consider exit loads, taxes and whether the original plan or your circumstances have genuinely changed.