What is asset allocation and stock selection?
Holly Warburton talks as part of the Guernsey Press Business Panel.
Asset allocation and stock selection are terms used when discussing the construction of an investment portfolio. Asset allocation refers to the higher level portfolio decisions such as whether to invest in equities or bonds for example or if a combination of both is preferred - how much to invest in each. This depends on investment objectives and the risk tolerance of an individual investor. It is based on the idea that different asset classes i.e. bonds or equities have similar characteristics and generally perform in the same way.
Stock selection is essentially the next step. If equities are the chosen asset class - which specific stocks? At this level, it is not assumed that all individual holdings within an asset class act the same way i.e. the stock price of a small technology start-up will not perform in the same way as a large blue chip name for instance.
The terms are also used frequently when discussing the performance of an investment portfolio; either on its own or compared to a benchmark or the general market. For example, the decision to own more or less equities can be positive or negative depending on the overall performance of the asset class. Similarly, the inclusion of certain stocks and the exclusion of others will also impact returns.
GP Business Panel 20 July 2017