This is the method of widening your investments across a variety of different asset sectors and geographical regions. Basically, don’t put all your eggs in one basket.
Asset allocation helps to reduce the chance of all your investments falling in worth at the same time and maximises the potential for smoother, and so, higher compound returns. This is the most efficient method in reducing risk when the assets selected rise and fall in worth independently of one another, that is, their movements in prices are not associated.
Asset allocation can effectively diversify the portfolio of an investor in one of two (2) ways.

1. Through the addition to your portfolio of assets, which are not related to stocks and shares. As an example, adding gold, commodities, and bonds to your portfolio of shares is known as vertical diversification.
2. Through the addition of stocks and shares assets only from other geographical regions (such as Nigeria, the United Kingdom, the United States of America and Europe) or other sectors (such as the financial, oil and gas or retail sectors) is known as horizontal diversification.

Ways of Allocating Assets;

1. You can strategically place your assets by allocating a fixed percentage of your capital investment to your different investments. For instance, a straightforward strategic allocation for a twenty-year term could be 50 per cent in stocks and shares, 25 per cent in bonds, 15 per cent in property and 10 per cent in commodities.
2. To exploit transient commercial or market conditions and augment returns, you can temporarily deviate from the strategic asset allocation above and revert to it when you have achieved your profits. This form of tactical asset allocation requires good knowledge of the market and good market timing.
3. The upkeep of the same portfolio weighting to each asset group, irrespective of which assets are rising or falling in value is termed the constant-weighting asset allocation. For instance, if the commodities portion rose in price from 10 per cent to 20 per cent of the portfolio, commodities would be sold and other assets purchased to revive the weighting.

When to Assess and Modify Your Portfolio of Investments Asset allocation may need to be modified over time, for two reasons:

1. Increase in volatility of the portfolio due to rises in the value of the assets and changing market conditions. This assessment does not have to be done every day. Every 3 to 6 months is sufficient and this is the beauty of long-term investment.
2. An individual’s age can lower the risk toleration of an investor, particularly in the years before retirement. The younger you are the more aggressive you can be with your investments and a large portion of your portfolio can consist of financial instruments such as equities (stocks and shares) and commodities. The closer you are to retirement age, the more cautious you should be and you might want to consider allocating a large portion of your portfolio to safer investments like bonds, treasury bills and cash.