Asset allocation: the decision that shapes almost everything else

Asset allocation is the decision about the proportions in which a portfolio holds fundamentally different sources of return: a stake in a business, debt, the money market, real assets. It shapes almost everything else not because individual securities do not matter, but because it is the proportion that sets which events the portfolio is exposed to in the first place. A rate decision, a tax revision or an economic downturn does not act on a particular ticker; it acts on the class as a whole. That is why picking a security within a class changes the result against a backdrop, while picking the proportion changes the backdrop itself. Asset allocation

Why the proportion outweighs security selection

Within an asset class, securities are tied together by a common cause. Shares of listed companies are repriced when the required return on equity changes; fixed-coupon bonds are repriced when the yield curve changes. You can pick a successful stock in a bad period for the equity market and still end up with a drawdown: the common cause is stronger than individual luck.

A practical conclusion follows: the questions "what to buy" and "how much to hold" are answered with different tools and in a different order. The multiple 3,77 for {{instrument:SBER}} helps to compare it with a peer company — and says nothing about what share of the portfolio should go to equities at all. The second question is settled before the first.

Strategic and tactical: two different decisions

Strategic asset allocation is the target proportion derived from your circumstances: the date until which the money is not needed, the stability of your income, the depth of drawdown you can accept. It lasts for years and changes when your circumstances change, not when prices change.

Tactical asset allocation is a deliberate deviation from the target proportion in response to the current market valuation. It makes sense only under two conditions: the deviation is limited by a band set in advance, and it has a rule for returning to target. Without a band and a return rule, tactics stop being a decision and become a reaction to the news feed.

If you cannot spell out how your tactical deviation differs from a change of strategy, you do not have tactics; you have drift.

The proportion comes from the horizon, not from a forecast

The horizon is the only parameter that cannot be changed by a decision: money needed for a payment in a year will not become money for twenty years just because the market looks attractive. The shorter the horizon, the less room the portfolio has for instruments whose exit price is determined not by you but by the state of the market on a particular day. More on this in the article on investment goals and horizon.

The second parameter is tolerance for drawdown, and not in words but in behaviour. A proportion that you will abandon at the bottom is worse than a more conservative proportion that you will stay in. This has to be tested beforehand, not while it is happening.

How the key rate reprices both parts of the portfolio

The rate is a common cause for the debt part and the equity part at once, and this is the main thing to understand about the balance between them. A rate rise lowers the current price of previously issued fixed-coupon bonds and at the same time raises the required return on equities, which means it weighs on their valuation. So "stocks and bonds will offset each other" is not a mechanical rule: in a rate shock they move together.

How a Bank of Russia decision is transmitted to the portfolio is covered separately: how the key rate works. For asset allocation, one thing follows from it: protection against interest rate risk comes not from the mere presence of bonds, but from their maturity and coupon type. OFZ issues with different duration and with a floating coupon behave differently under the same rate decision.

What counts as a separate class

An asset class is not a label but a set of securities with a common cause of repricing. A useful test: if two sets move together in response to the same event, then for allocation purposes they are one class, however differently they may be named in the broker's app.

• Equity instruments — the return depends on the profit of the business and how it is distributed; the stream of payouts can be checked against the dividend calendar: {{dividend_calendar|limit=5}}
• Debt instruments — the return is known from the terms of the issue, the price depends on the rate and on the issuer's credit quality; see the bonds section
• Collective investment vehicles — not a separate class but a wrapper; what you need to look at is the composition, not the name of the fund
• Digital financial assets — the rights are defined not by the market but by the decision on the issue; how this works is explained in the article on buying digital financial assets

{{callout:warning}}A fund with a broad name may consist entirely of securities from one class and one sector. Diversification that exists only in the name of the product does not work in the portfolio.{{/callout}}

Rebalancing: the mechanism that makes the proportion work

Without a return to the target proportion, the portfolio tilts over time towards the class that has risen in price, and risk grows by itself, without any decision on your part. Rebalancing is a rule set in advance: by the calendar (once a year, once every half-year) or by a threshold for how far a weight has deviated from its target.

Both rules come at a cost: trades, the spread and tax on the realised financial result. Frequent rebalancing is therefore not better than infrequent rebalancing — it is simply more expensive. A sensible order is to direct new contributions to the lagging class first, and only then to sell the class that has risen.

Taxes and costs are part of the decision, not a footnote

The proportion lives within a tax framework. The long-term holding exemption, the deductions on an individual investment account and the procedure for offsetting losses change what you actually keep, and so they affect how the classes compare with each other. The basic rules on investment income are 13%. Current parameters should be checked against the primary source: they change more often than your target proportion does.

What asset allocation does not do

It does not protect against loss and it does not set the return. It does something else: it turns the outcome from a random result into something understood in advance — you know which risk you are exposed to and to what extent, and you can check this against issuers' financial statements in the reports section. The platform does not calculate exactly what share of the dispersion in results is explained by the proportion, so the absence of numerical estimates here is deliberate — the claim about "almost everything else" in the headline is about the mechanism, not about a measured quantity.