The purpose of the asset allocation decision is to weigh the investments expected reward against the risk associated with that decision. This information, in conjunction with the investor's tolerance for risk, is the primary factors necessary to determine a proper asset allocation mix. This will differ for individuals in different circumstances. For example, a young, single individual with a steady income can afford to take more risk in their asset allocation mix than can a person who is retired with little excess income.
Most investors recognize the importance of having an equity position in their portfolio.
It is a means of acquiring capital appreciation, which can offset the negative influence of inflation on personal wealth. However, equities carry an expensive price tag, which is that they can also generate losses over certain periods of time. This element of risk and volatility is what investors hope to eliminate through the use of asset allocation. By allocating investment dollars among many classes of assets, you diversify your portfolio. This reduces, but does not eliminate risk.