What is The Optimal Asset Allocation
Lesson summary:
When a retail investor walks into a bank with $10,000, the bank will ask them questions to draw up a risk profile and then recommend an asset allocation. This allocation typically has little to do with the current yield of the assets and is based more on the bank’s mindset that caters to the emotions of the consumer rather than the investor. The asset allocation suggested by banks might not always make sense, for example, if stocks are cheap, it might be better to buy stocks instead of bonds. The bank might also recommend domestic stocks, but this could be more emotional and not necessarily where the best returns are. It is important for investors to learn how to value the asset classes and determine the level of exposure they would like to have in their portfolio.