Assets change all the time. Not monthly or quarterly or yearly. But rather, a given index is supposed to reflect a market subset, and as the elements that comprise that index change all the time, continuously, so too then has to change the allocation of those assets, so that they reflect the index.
Example.
You have created an index fund that will be 10% telecom companies. Always. As such, when T and VZN and CMCSA go up and down, you'll need to dynamically adjust the asset allocations to that area to maintain the 10% ownership reflection you promised investors.
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Finance: What is asset allocation?1 Views
finance- a la shmoop. what is asset allocation? alright well we have one
basket, and we have all of our eggs and we have enemy boulders ditches and speed [girl holds basket]
bumps in our way. they're all out to get
us. and everything's fine as we walk along
the path of life until one day, yeah oops carnage. well how do you avoid whoops in
the land of finance? well there are a couple of key things to keep in mind and
in baskets. first investments in an of an asset class like oil or transportation
or commodities like cotton or technology like software, very roughly tend to all
move together like Canadian Geese in the spring. that is the price of oil
controlled by Royal Dutch Shell, correlates almost exactly with the price
of oil controlled by British Petroleum or BP. there are two different stocks but
they generally move in lockstep so if you invested in one company odds are [man sits on mossy bench]
good that its performance will have been very similar to that of all of its
competitors in the same oil producing space. oil is an asset and the notion of
intelligent asset allocation is that you want to diversify away risk in your
portfolio by diversifying the asset classes in which you put your dough. so
if you wanted to be broadly exposed to the S&P 500 with its dozen or two asset
classes, well you'd want to pepper your eggs in some semi even distribution may be across baskets in telecommunications real estate utilities retail insurance
banking and so on. such that when those potholes come along and you trip in one [eggs put in a line of baskets]
and you most certainly will and the basket ends up looking more like paper
when you stand up because you smushed it. well then you still have eggs to cook
from other baskets you put your money in. if that still doesn't work well maybe go
vegan. [girl stands in kitchen with empty basket and fruits on the counter]