What is Asset allocation?
Aktivlar taqsimoti
In short
Deciding in advance what share of the portfolio sits where: for example 70% in a broad ETF, 20% in individual stocks and 10% in cash.
Also known as: core-satellite, allocation
Asset allocation means deciding in advance what share of the portfolio sits where. For example: 70% in a broad ETF, 20% in individual stocks, 10% in cash. This decision often affects results more than the choice of any particular stock.
The core-satellite approach
A simple scheme many investors use:
- Core — the bulk of the portfolio in a broad, low-cost fund. It grows with the market and provides diversification.
- Satellite — a smaller part in stocks or ideas you pick yourself. Even if you get it wrong, the whole portfolio is not at risk.
- Cash — a reserve for opportunities in a sell-off and for peace of mind.
How to choose
The split depends on your goal, time horizon and risk tolerance. If you need the money in 1–2 years, a smaller stock share makes sense; with a 10+ year goal you can tolerate more swings. The key is to write the rule down when markets are calm, not in a panic.
Over time
Market moves gradually distort the allocation: the part that grew gets bigger. Bringing it back to target is rebalancing.
The bulk sits in a broad halal ETF that grows with the market. A small part goes into stocks you analysed yourself. Cash covers emergencies and cheap prices.
Example
A $20,000 portfolio with a 70/20/10 target (hypothetical):
- Broad ETF: $20,000 × 70% = $14,000
- Individual stocks: $20,000 × 20% = $4,000
- Cash: $20,000 × 10% = $2,000
Suppose the market falls 20% and the chosen stocks fall 35%:
- ETF: $14,000 × 20% = −$2,800
- Stocks: $4,000 × 35% = −$1,400
- Cash: $0
Total loss $4,200, or 21% of the portfolio. Had everything been in the chosen stocks, the loss would have been 35%. Work out how long reaching your goal takes with new contributions in the time-to-goal calculator.
Mistakes and tips
Write your allocation down (for example in a journal) — otherwise it drifts with market mood.
Cap the satellite part by risk: even its worst outcome should not knock you off your plan.
Don't change the allocation every month — its value comes from consistency.
Frequently asked questions
- What asset allocation is right for a beginner?
- There is no universal answer — it depends on goals, horizon and risk tolerance. Many start with a simple scheme: most in a broad fund, a smaller part in individual stocks and some cash.
- What is the difference between asset allocation and diversification?
- Allocation is the plan for how money is split between kinds of assets. Diversification is spreading the money within each part across many companies.
Learn it in the Academy
This term is covered with hands-on examples and a quiz in these lessons of the interactive course.
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