The Deep Logic of Asset Allocation: Role Positioning of Different Asset Classes

Many investors have a fundamental misunderstanding when building investment portfolios:

. This unrealistic expectation often leads investors to adjust their portfolios frequently when assets underperform, ultimately harming long-term returns.

According to research, asset allocation contributes up to 90% to the performance of U.S. investment portfolios and explains 40% of the performance differences among domestic hybrid funds [1]. This indicates that the key to investment success lies not in timing or stock selection, but in the correct understanding of

.

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Bear main risks and obtain long-term excess returns

• High Volatility
  : The S&P 500 Index rose 14.62% in 2025, but experienced剧烈 fluctuations from a low of 4,835 points to a high of 6,946 points during the period [0]
• Long-Term Growth
  : The Nasdaq Index rose 17.49% for the full year, reflecting the growth momentum of tech stocks [0]
• Anti-Inflation Attribute
  : Corporate profitability grows with economic development, naturally hedging against inflation

• Requiring stocks to rise in any period
  -大幅 cutting stock positions due to short-term volatility (-20%)
• Ignoring the irreplaceable role of stocks in long-term purchasing power protection

The responsibility of stocks is not ‘stability’ but ‘growth’. Its value needs to be measured over a 3-5 year period. If you reduce holdings because of poor performance in a certain quarter or year, it is equivalent to firing the best long-term wealth growth tool.

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Smooth portfolio fluctuations and provide liquidity support

The long-term Treasury ETF (TLT) fell 10.34% between 2024 and 2025 [0], which made many investors question the value of bonds. However, this short-term perspective ignores the true role of bonds.

• Volatility Buffer
  : When the stock market falls, bonds can often provide hedging
• Rebalancing Ammunition
  : Bond price declines provide opportunities to buy stocks
• Income Stabilizer
  : Provide continuous coupon income

-大幅 reducing allocation because of low bond yields

• Requiring bonds to rise in all market environments
• Ignoring the key role of bonds in liquidity crises

The responsibility of bonds is not ‘high returns’ but ‘system stability’. In a stock market up year like 2025, it is normal for bonds to perform flat or even negative. But when the stock market corrects, bonds will play a key defensive role, allowing investors to respond calmly and avoid selling stocks in panic.

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Hedge against inflation risks and capture structural opportunities

The Gold ETF (GLD) rose 108.21% between 2024 and 2025 [0], fully reflecting the explosive power of commodities in specific environments.

• Inflation Hedge
  : When inflation rises, commodity prices often rise
• Currency Depreciation Protection
  : Precious metals like gold hedge against paper currency depreciation
• Geopolitical Insurance
  : Provide safe-haven value when uncertainty increases

• Requiring commodities to rise continuously and stably (in fact, commodities are the most volatile)
• Completely abandoning commodity allocation because of severe short-term volatility
• Ignoring the ‘insurance’ attribute of commodities in investment portfolios

The responsibility of commodities is not ‘stable appreciation’ but ‘specific risk hedging’. Its allocation ratio is usually small (5-15%), but it can play a unique role at critical moments (such as high inflation, currency depreciation, geopolitical conflicts).

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Maintain liquidity and seize investment opportunities

• Opportunity Reserve
  : Have cash to ‘buy the dip’ when the market crashes
• Psychological Safety Cushion
  : Holding a certain amount of cash reduces investment anxiety
• Emergency Fund
  : Handle unexpected expenses and avoid forced asset sales

• Overholding cash (long-term yield lags behind inflation)
• Daring not to invest and hoarding cash because of market declines
• Ignoring the strategic value of cash in rebalancing

The responsibility of cash is not ‘appreciation’ but ‘retaining options’. It is a safety net that ensures investors will not be forced to sell at the wrong time in extreme cases.

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This expectation violates the basic principles of asset allocation.

.

The 2025 market data clearly shows this:

• Strong performance of the stock market (S&P 500 +14.62%) [0]
• Skyrocketing gold prices (GLD +108.21%) [0]
• Decline in long-term Treasuries (TLT -10.34%) [0]

If investors drastically reduce bond allocation because of poor bond performance, they will lose important defensive tools in future market adjustments.

Many investors chase up when they see an asset class perform well and cut positions when it underperforms. This behavior is essentially ‘chasing ups and downs’ and is the biggest killer of investment returns.

According to research, asset allocation contributes far more to long-term returns than timing or stock selection [1]. Frequent allocation adjustments not only increase transaction costs but also may miss the main uptrend of assets.

The value of asset allocation does not lie in the performance of a single asset, but in

.

A portfolio containing stocks, bonds, commodities, and cash may underperform an all-stock portfolio in a certain period, but in the long run:

• Lower volatility
• Smaller maximum drawdown
• Easier for investors to坚持

Ultimately, what determines investment success is not the portfolio with the highest return, but the portfolio that investors can stick to for the long term.

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Asset Class	Core Responsibility	Evaluation Period	Allocation Principle
Stocks	Long-term growth	3-5 years	As the main source of income, bear high volatility
Bonds	System stability	1-3 years	Smooth portfolio fluctuations and provide liquidity support
Commodities	Risk hedging	5-10 years	Small allocation (5-15%) to应对 specific risks
Cash	Retain options	Dynamic adjustment	5-10% as strategic reserve

Before starting to invest, set a

for each asset class:

• Stock Expectation
  : Annualized return of 8-12%, but may bear a drawdown of -30% or even larger
• Bond Expectation
  : Annualized return of 3-5%, with volatility far lower than stocks
• Commodity Expectation
  : May have an explosive opportunity once in a 5-10 year cycle
• Cash Expectation
  : Yield is lower than inflation but provides a sense of security

With these expectations, investors will not be surprised when an asset class underperforms, thus avoiding emotional decisions.

When an asset class deviates from the target allocation by more than 5-10 percentage points due to market fluctuations, perform

:

1. Sell part of the assets with较大 gains
   (sell when overvalued)
2. Buy underperforming assets
   (buy when undervalued)
3. Restore the target allocation ratio

This mechanism can:

• Automatically实现 ‘sell high and buy low’
• Control portfolio risk
• Avoid emotional decisions

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The ultimate goal of asset allocation

.

When investors understand:

• The volatility of stocks is the necessary cost to obtain long-term returns
• The flat performance of bonds is the ballast for portfolio stability
• The explosion of commodities is the insurance for specific risks
• The reserve of cash is the ammunition to seize opportunities

They can avoid the trap of ‘wrongly adjusting the portfolio because of short-term poor performance’.

According to research, asset allocation contributes up to 90% to portfolio performance [1]. This means

.

The real investment wisdom does not lie in predicting the future, but in preparing for an uncertain future. By clarifying the role positioning of various assets, investors can build a portfolio that has both offense and defense, can grow and stabilize, remain calm in the ever-changing market, and finally achieve long-term wealth goals.

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[1] Jinling API Data - Market index data, stock price data, sector performance data (2024-2025)

[2] Sina Finance - “A Complete Guide to What is Asset Allocation!” (https://finance.sina.com.cn/roll/2025-07-22/doc-infhhxmf4907949.shtml)

[3] Cathay Holdings - “Asset Allocation Full Analysis: Definition, Proportion Allocation and Asset Type Introduction” (https://www.cathayholdings.com/holdings/brand/assetmanagement/article_list/article_content?newsID=hMghL0ouIUeG76w2TNITXw)

[4] Invesco - “Tactical Asset Allocation - October 2025” (https://www.invesco.com/apac/en/institutional/insights/multi-asset/tactical-asset-allocation-october-2025.html)

[5] BlackRock - “2025 Fall Investment Directions: Rethinking Diversification” (https://www.blackrock.com/us/financial-professionals/insights/investment-directions-fall-2025)

[6] Morningstar - “Portfolio Diversification Is Winning in 2025” (https://www.morningstar.com/portfolios/portfolio-diversification-is-winning-2025)