Asset Allocation

The fundamental principle of asset allocation is "diversification." By combining asset classes with different price movements, you can pursue returns while suppressing the overall portfolio risk (range of price fluctuation). Stocks offer high returns but also carry high risk, while bonds offer lower returns with correspondingly lower risk. Combining these two allows you to adjust the balance between risk and return.

A representative allocation model is the basic portfolio of Japan's Government Pension Investment Fund (GPIF): 25% domestic stocks, 25% foreign stocks, 25% domestic bonds, and 25% foreign bonds - an equal-weight allocation designed for stable long-term returns. For individual investors, the stock ratio should be adjusted based on age and risk tolerance. The simplified rule "100 minus your age equals your stock percentage" is widely known, but it is merely a guideline and requires customization based on individual financial circumstances and investment objectives.

The process for building an asset allocation starts with clarifying your investment purpose and time horizon, then self-assessing your risk tolerance, and finally determining specific allocation ratios. For someone in their 20s-30s saving for retirement, setting the stock ratio at 70-80% to pursue long-term growth makes sense. For someone in their 50s or older approaching retirement, increasing the bond and cash ratios to reduce risk is appropriate.

Once established, your allocation ratios will drift due to market movements. If stocks rise significantly, the stock ratio exceeds the target; if they fall, the ratio drops. Correcting this drift is called "rebalancing." At a frequency of once or twice per year, you buy and sell asset classes that have deviated more than 5% from their targets to restore the original allocation. Rebalancing is the act of "selling what has become expensive and buying what has become cheap," and this contrarian effect is believed to contribute to improved long-term returns.