Asset allocation: Building a strong retirement investment plan

Asset allocation is a significant factor in retirement investing. Research differs on exactly how much it contributes to overall returns, with some studies putting the figure as high as 90% and others suggesting around 70%, but the message for retirees is clear: how you divide your money across asset classes deserves careful attention.

What is asset allocation?

Asset allocation is how you allocate your investments across a range of different assets. If you had $100 and split that evenly between assets A, B, C and D, your asset allocation would look like this:

For most investors and retirees, the asset classes they invest in will include equities, property, fixed income, cash, infrastructure and alternatives such as hedge funds and private equity.

Different asset classes have different risk and return properties and will usually be classified as either growth or defensive.

Growth assets are higher risk and have the potential for higher returns, but their values may be volatile in the short term. There is a general expectation that the underlying asset value will increase (grow) over time, although this is not guaranteed.

Growth assets include equities, property, infrastructure and some alternative assets, like private equity.

Defensive assets are lower risk and generally produce steadier, lower returns. The value of these assets will usually remain relatively unchanged over time, although the income produced from the asset can still vary.

Defensive assets include fixed income and cash.

The difference between asset allocation and diversification