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Allocation

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In general, allocation means to distribute according to some plan. In investing, allocation is heard most often in "asset allocation." Large pension funds and individual investors alike aim for an allocation of funds that best achieves their investment objectives, like safety, steady income, and capital appreciation. Asset allocation for the individual investor usually focuses on relative percentages of bonds and stocks (eg, 60% stocks and 40% bonds). Bonds provide safety and steady interest payments. Stocks vary widely in their risk and, based on their dividend policy, the size and regularity of cash payments. In making both inter-group and intra-group allocation decisions, investors seek balance, so that strong performers will offset other assets that will likely perform poorly under the same conditions. Optimum asset allocation necessarily varies over time, both because investors have different needs at different stages of their lives and because the investing environment continually changes. For example, young investors will usually have a heavy allocation of stocks because capital appreciation will build their retirement nest-egg, while retirees will want a greater allocation of bonds for steady income.



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