Asset allocation is more important than stock selection in investing because it smooths portfolio returns and controls downside risk, while stock selection relies on predictions of individual companies' future prospects, which are highly uncertain. Long-term investment practice shows that the key factor determining the final return of an account is the asset class and its proportion, not the success of stock selection. Therefore, sound asset allocation is the cornerstone of investment success.
In simple terms, asset allocation is diversifying your investments across different types of assets based on your investment goals, time horizon, and risk tolerance. These assets typically include stocks, bonds, cash-like products, and other categories such as gold. The core idea is to build a diversified portfolio to avoid significant impacts on your overall wealth due to sharp fluctuations in a single market or asset.
The Importance of Asset Allocation
Effective Risk Diversification
Different types of assets perform differently in different market environments. For example, during economic booms, the stock market often performs well and can generate high returns; while during economic recessions or market turmoil, assets such as bonds and cash have better stability and value preservation functions. 1. By diversifying investments across multiple assets, investors can reduce the impact of volatility in a single asset on their overall portfolio, avoiding significant losses due to a sharp decline in any one asset.
Asset allocation helps achieve long-term investment goals
Investors' goals typically include preserving and increasing wealth, retirement planning, and children's education. These goals often need to be achieved over a long period. A reasonable asset allocation can adjust the portfolio's asset proportions according to different stage goals and risk tolerance, adapting to market changes and ensuring the portfolio's steady growth in different market environments, thus increasing the likelihood of achieving long-term investment goals.
Asset allocation can improve the portfolio's risk-return ratio
By scientifically selecting and rationally allocating different assets, investors can pursue higher returns while controlling risk. For example, by appropriately allocating some high-potential emerging industry stocks to a portfolio, while simultaneously allocating a certain proportion to bonds and cash, investors can both share in the growth potential of the stock market and mitigate losses during market downturns through the stable performance of bonds and cash, thereby improving the overall portfolio's risk-return ratio.
Asset Allocation for the Future
To bridge the gap between people's economic capabilities and needs, personal savings and investment will become a more important part of retirement income than any form of government pension. Therefore, in the current environment, with increasing life expectancy and low bond yields and extremely low or even negative interest rates, investors need more than ever to properly allocate risky assets.
Focus on Asset Allocation Rebalancing
Don't put all your eggs in one basket: If you have two assets, A and B, with different risk-return characteristics, a fully invested portfolio in equity-based asset A often yields unsatisfactory returns after two cycles of market volatility. However, if you include asset B, which has a relatively stable risk-return profile, the portfolio can achieve a rebalancing state after two cycles, potentially even improving the overall return.
Conclusion
Asset allocation plays an irreplaceable role in bank wealth management. It not only helps investors diversify risk and maximize returns but also meets different financial goals and risk tolerance levels, making it an indispensable strategy for investors in bank wealth management.
