What is asset allocation?

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When it comes to reducing risk and helping your money grow, asset allocation plays an important role. But what exactly is involved?

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Asset allocation takes account of your individual circumstances and financial goals, as well as your attitude to risk. This simply means how much risk you’re willing to take to help your money grow.

What is asset allocation?

Once we’ve understood your requirements, and your attitude to risk, we can identify the different types of asset to invest your money in to help you achieve your goals. This is called asset allocation.

How does it affect your money?

By taking the time to carefully select your individual asset allocation, we can help to keep risk to a minimum and maximise potential returns. You should remember that investment returns are never guaranteed. So while there’s a chance your retirement savings could grow, their value can also go down. This means that you could get back less than what you put into your pension.

How do we decide where your money is allocated?

No single asset class or geographical area is consistently the best, year in, year out. That’s why we put together short and long-term investment strategies and spread your money over a range of asset classes, to reduce your risk and give you the best possible returns. We also pay close attention to the economic cycle and global market conditions to make sure we’re making good decisions when it comes to your investments.

What are the different asset classes?

There are lots of different asset classes, including some where we expect to see good growth over the long term. Here, we explain what the most common asset classes are.

A chart of different asset types. This image is an infographic and has alternative text available if you are using a screen reader.

Corporate bonds: A corporate bond is essentially a loan the investor gives to a company for a period of time. Like ordinary loans, they'll pay back the original amount, plus any interest.

Pro: They usually offer higher returns than government bonds and are more predictable than company shares.

Con: A company could go bankrupt and fail to pay back the loan.

 

Equities: Equities, or company shares, are shares sold by limited companies to raise funds. In return, buyers may receive a share of the profit (known as a dividend).

Pro: There’s potential for greater returns over the long term.

Con: Shares are bought and sold on the stock market so they can fluctuate.

 

Gilts: Gilts are loans investors give to the Government. They work in a very similar way to corporate bonds.

Pro: they're less volatile than company shares, and there are more opportunities for growth than with a deposit account. The Government's also unlikely to go bankrupt.

Con: These usually offer lower returns than corporate bonds. As with all investments, returns are never guaranteed.

 

Property: This covers a range of retail, office and industrial properties (direct property funds) or Real Estate Investment Trusts or shares in property companies (property security funds).

Pro: These funds can reinvest income, which can provide growth and protect against inflation.

Con: Property can take time to sell, so you might not be able to cash in when you want to. Property valuations are based on a valuer's opinion rather than fact.

 

Absolute returns: An absolute return is a fund that seeks to make a positive return for investors, regardless of any underlying market conditions.

Pro: It can offset periods where other assets may struggle to deliver good returns.

Con: It's not guaranteed to make a positive return.

 

Commodities: A commodity is substance or product that can be traded, like oil, gold and grains.

Pro: They don’t move in line with the market or other asset classes, so it's a good asset to have in the portfolio.

Con: They are very volatile. Gains can be lost quickly as prices can swing wildly.

 

High yield bonds: A high yield bond is a loan to a company that pays out high interest because it's thought to be riskier, as there's a high chance that the company won't be able to pay the loan back.

Pro: They can act differently to equities, so if the equity market falls, these bonds can provide growth.

Con: You need experts and a lot of research to choose the right bonds to invest in.

 

Cash/deposits: Cash investments are placed on deposit with a financial institution and they earn interest - similar to your bank account.

Pro: There's easy access to your money, and they're generally considered safer than other asset classes.

Con: If interest rates are low, returns will be low too, and investment growth could be lower than the charges on your pension.

 

Index linked bonds: Index linked bonds work in the same way as gilts, but the capital amount returned and income payments take account of inflation rises.

Pro: These are useful if the cost of living is going up, as the interest and final payments are inflation-proof.

Con: If inflation falls, interest rates could rise, making conventional savings plans more competitive than these bonds.

 

Find out more

If you want to find out more about your pension or investments, you should speak to a financial adviser, who can provide advice based on your individual circumstances.

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