Asset allocation is spreading out your investment in various financial assets to maximize your profit while minimizing your risk. However, as I stated before, in order to achieve a higher return, you must take a higher risk. A low risk portfolio would be invested in all bonds, and from 1926 to 2018 achieved an average annual return of 5.3% with low volatility. A moderately high risk portfolio would be invested in all stocks, and from 1926 to 2018 achieved an average annual return of 10.1% with much higher volatility.
Professional stock pickers are merely making educated guesses as to which stocks will appreciate the most over the next year. This is because no one can accurately predict the future. Wall Street is myopic in their focus on short-term returns. In contrast, Warren Buffet, Chair of Berkshire Hathaway, has always focused on long-term profits.
Even with all their computer models and data dumps, not a single active stock picker has consistently beaten the overall rise or fall of the market, as measured by the stock market indexes of the Dow Jones Industrial Average, the S&P 500, or the Nasdaq. Therefore, the only way to achieve consistent average returns is to invest in a broadly diversified portfolio of investments. As mentioned before, a portfolio of 100% stocks has achieved a 10.1% average return over the 90+ years from 1926 to 2018.
As a small investor, you will not have enough money to diversify by buying stocks yourself. Experts say you should have a minimum of 20 diverse stocks in a portfolio. Instead, you should invest in a mutual fund that contains all S&P 500 stocks. Almost every mutual fund company has a fund that is exactly that. Currently, you do not need to invest in bonds due to their lower returns. However, when you get within five years of retirement, you will need to rethink that strategy.
Finally, in your portfolio allocation, you do not need to invest in a global stock portfolio. This strategy was popular over fifteen years ago because when the U.S. was in a recession, Europe was not in a recession. This is no longer true. Globalization has connected world economies, and now European and U.S. Economies are procyclical. Another reason you do not need to invest in a global stock portfolio is that a portfolio of European stocks have consistently underperformed the S&P 500 by about 1% annually. Europe does not have the high-fying tech stocks like Apple or Google that are included in an S&P 500 mutual fund. In any case, most of the largest European companies like Nestle, BMW, or Mercedes are also listed on the U.S. stock exchanges.