Asset Allocation

Allocation is the mix itself, set before any individual holding is chosen. Brinson, Hood and Beebower found in 1986 that allocation policy explained the large majority of the variation in returns across pension funds over time, and the finding has been re-examined often enough since to be treated as settled in outline if argued over at the margins.

Each asset class is being hired for a different job. Equities carry the growth and most of the volatility. Bonds dampen the swings and pay a modest coupon. Cash guarantees nominal value while losing real value to inflation, which is a fair trade over months and an expensive one over decades.

Age-based rules of thumb, such as 110 minus age in equities, encode one variable, time horizon, and leave out the others that matter: how stable the income is, how large the liquid buffer already is, and how the household behaved the last time markets fell 30%. Promi describes a mix rather than grading it: above 80% in equities reads as growth-weighted, above 60% as growth-tilted, above 40% as balanced, and anything lower as stability-weighted.