Glossary
What is asset allocation?
Updated Reviewed quarterly
Asset allocation is the split of a portfolio across asset classes — typically equities, bonds, property, cash, and (sometimes) commodities or alternatives. The split is usually expressed as percentages (e.g. "60% equities, 30% bonds, 10% cash"). Asset allocation is widely regarded as the single largest driver of long-term portfolio risk and return — far more impactful than individual security selection or market-timing.
Why asset allocation matters more than stock-picking. The classic Brinson, Hood and Beebower (1986) and follow-up studies analysed large US pension funds and found that the asset-class split (equity / bond / cash) explained the overwhelming majority of the variance in those funds' returns over time — substantially more than market-timing or security-selection. The exact "90%" figure is sometimes overstated in popular finance writing, but the broad conclusion — your allocation matters more than which individual stocks you pick — holds up across replications. For an NZ investor, the biggest decision isn't which NZ company to back; it's how much of your money is in equities versus everything else.
Common NZ allocations. Aggressive/growth portfolios typically run 80-100% equities, 0-20% bonds + cash. Balanced portfolios sit around 60% equities, 30% bonds, 10% cash. Conservative (often pre-retirement) portfolios may be 30-40% equities, 50-60% bonds, 10% cash. KiwiSaver funds publish their target allocation in the fund disclosure — it's worth checking yours matches your timeframe.
Building an allocation with NZX-listed ETFs. A simple 70/20/10 (equity / bond / cash) NZ portfolio could be: 70% global equity via KGM or USF + FNZ for NZ tilt, 20% bonds via NZB (Smartshares NZ Bond) or NGB (NZ Government Bond), 10% cash via on-call bank account or short-duration TD. All wrapped in PIE for tax simplicity.
The cost of getting it wrong. An investor with a 10-year retirement horizon shouldn't be 100% in equities (drawdown risk is too high). An investor with a 40-year horizon usually shouldn't be 50% in bonds (giving up too much expected return for risk reduction they don't need). The right allocation depends on time horizon, risk tolerance, and other income sources.
Rebalancing. Once you set an allocation, it drifts as markets move. Most investors rebalance annually (or when a category drifts more than 5 percentage points from target). For NZ-PIE-only portfolios, multi-asset funds like KGH (Kernel High Growth) handle rebalancing automatically. For self-built portfolios, rebalancing is manual but cheap on zero-commission platforms.
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