Allocating assets is closely related to diversification. It is possible to reduce risk by both diversifying within asset classes and between asset classes.
Equities are an asset class. In some markets, depending on economic conditions, an investor can diversify within the equities asset class, for example, by investing in American equities and Emerging Market equities. This would give the investor exposure to several different world economies. Similarly, you could invest in large companies and/or small companies that are growing quickly.
Bonds (loans to companies or governments) are another popular asset class. Typically, the returns from a bond fund are lower than the returns from equities, but the risk profile is also generally lower. Remember - the higher the potential return, the higher the risk.
Alternatives are another class of investment assets and include commodities (such as oil, gold, soya beans and wheat), property and hedge funds.
By diversifying your investments across a number of asset classes, it is possible to construct a portfolio of investments to match your risk profile.
The table below shows sample diversified portfolios that correspond with conservative, balanced and growth risk profiles.