FT Guide to Saving and Investing for Retirement

Chapter 14

Expected Return and Risk

Forward-looking expected return, risk and correlation

‘Prediction is very difficult, especially if it’s about the future.’

Niels Bohr

Asset allocation is the process of appropriating capital to each asset class. It broadly sets the portfolio’s risk and return profile and, as such, it is the heart of investment strategy. It should match your return objective, risk tolerance and investment constraints, in particular time horizon and liquidity needs.

Asset allocation should mix assets based on how they are likely to perform in the future, not based on how they have performed in the past. To do so, we need a crystal-ball framework to predict the future.

Government’s assumptions

Each year, pension administrators ...