Asset allocation is the cornerstone of a successful investment strategy. Choosing the right assets in the right proportions determines the bulk of your long-term performance — and above all, your ability to navigate crises without selling at the worst possible moment. This article opens a series dedicated to in-depth analysis of different asset allocation strategies. Our evaluation will go beyond performance alone: it will integrate a detailed study of associated risks, volatility and long-term financial sustainability.
In my book "Les Déterminants de la Richesse", I have already examined many investment portfolios in detail. For this series, rather than revisiting them all, we will focus first on the most established strategies before exploring more innovative and unconventional approaches.
The ETF explosion
This is an opportune moment to address ETFs (exchange-traded funds), which form the building blocks of asset classes within investment portfolios. Their growth has been nothing short of spectacular. At end-2024, the global ETF market represented approximately $13'800 billion in assets under management, with more than 9'500 ETFs available worldwide. The industry has grown at an average annual rate of 20% since 2008, and in 2024 alone, inflows exceeded $1'670 billion.
This proliferation makes navigating the ETF universe increasingly complex. To put things in perspective, there is now roughly one ETF for every four companies listed on global stock markets. A striking paradox emerges: these instruments, originally designed to simplify investing by consolidating supply, end up creating counter-productive market fragmentation.
Among the notable trends observed in 2025, active ETFs have surged — assets under management grew 52% to reach $1'030 billion. Thematic ETFs (artificial intelligence, cybersecurity, renewable energy) are also attracting considerable investor enthusiasm.
Why asset allocation matters
Why focus on portfolio construction? Isn't it more important to concentrate on individual stocks or to invest directly in an ETF that already constitutes a diversified portfolio? The question is legitimate.
First and foremost, the fundamental principle of diversification applies — as the old saying goes: "don't put all your eggs in one basket." A portfolio composed solely of twenty Swiss company stocks cannot be considered truly diversified. The issue is not so much the number of holdings but the double concentration of risk: on a single asset class (equities) and a single geographic area. This monolithic approach exposes investors to excessive vulnerability to market disruptions.
The risks of concentration
Holding a single ETF, even a highly diversified one, is not without risk. Take GAL, managed by SPDR (SSGA), as an example. Its current composition breaks down as follows: one third in US equities, one quarter in international equities (ex-US), one third in bonds and the remainder in cash. This represents a respectable level of diversification for a single instrument.
The major issue lies in the excessive concentration on a single ETF. Although SSGA enjoys a solid reputation, it would be imprudent to completely dismiss the risks of fraud or counterparty failure. Financial history has repeatedly demonstrated that even the most prestigious institutions can suffer dramatic reversals. Investing a substantial portion of one's capital in a single ETF is therefore inadvisable — except for beginner investors with modest assets, for whom this approach can serve as a pragmatic starting point.
Controlling volatility
The second major reason to pay close attention to asset allocation is volatility control. While performance remains an essential criterion, it cannot be the sole decision factor.
If it were, investors would concentrate all their holdings in Bitcoin, whose average annual return has far exceeded 100% since its creation. At such a rate of return, everyone would quickly accumulate wealth. The reason this strategy is not universally adopted is that it carries significant risks that must be taken into account.
Three dimensions of volatility risk
1. The underestimated psychological impact. Even when we consider ourselves psychologically resilient, we generally tend to significantly underestimate the influence of market fluctuations on our emotional state and, consequently, on our ability to make rational decisions. Maintaining composure in the face of market movements is particularly challenging: we are naturally inclined to become excessively enthusiastic during strong rallies and, conversely, to panic during significant declines.
2. The unpredictability of markets. The future is, by nature, unpredictable. Although Bitcoin has experienced a spectacular rise since its creation, no one can predict its future trajectory with certainty. It could continue to grow, stabilise, or decline significantly. Prudence and a long-term perspective remain essential in the face of these inherent market uncertainties.
3. Sequence of returns risk. As I develop in detail in my book, volatility constitutes a major risk, particularly during the capital withdrawal phase. An asset allocation too heavily exposed to speculative investments can seriously compromise long-term financial sustainability at a critical moment. This vulnerability must be anticipated and managed with the greatest care in any long-term investment strategy.
Judicious diversification across asset classes within a portfolio is therefore indispensable for managing and mitigating all of these financial risks.
The main asset classes
To build a truly diversified portfolio, it is essential to understand the different asset classes available and their specific characteristics. The table below provides a synthetic overview of their key properties:
| Asset class | Return potential | Volatility | Inflation protection | Primary role |
|---|---|---|---|---|
| Developed market equities | High | Moderately high | Strong | Capital growth |
| Emerging market equities | Moderate | High | Partial | Diversification |
| Government bonds | Low | Low | Weak | Stability and safety |
| Corporate bonds | Moderate | Low to moderate | Weak | Regular income |
| Gold / Precious metals | Moderate to high | Moderate | Strong | Safe haven, hedge |
| Real estate (REITs) | Moderate to high | Moderate | Strong | Income + inflation hedge |
| Cash | Very low | None | None | Tactical reserve |
Each asset class plays a distinct role in a well-constructed portfolio. Developed market equities offer high growth potential with relatively moderate volatility. Government bonds are a defensive asset class, but not without risk. Corporate bonds offer higher returns than government bonds with slightly higher risk. Commodities — gold and other precious metals — serve as protection against inflation and systemic crises. Finally, listed real estate (REITs) provides exposure to the property sector with the liquidity of an exchange-traded security.
The weighting between these asset classes — which is precisely what we explore in the following articles in this series — largely determines the risk/return profile of your portfolio over the long term.
Frequently asked questions
Why not simply invest in the best-performing ETF?
This approach has two major problems. First, it is impossible to predict which ETF will perform best in the future — past performance never guarantees future results. Second, even the best ETF goes through periods of underperformance. Diversifying across several asset classes smooths these variations and reduces the overall portfolio risk.
How many ETFs should a diversified portfolio contain?
There is no universal answer, but generally a well-diversified portfolio can be built with 4 to 8 ETFs covering different asset classes and geographies. Beyond this number, the benefits of diversification diminish while management complexity increases. The goal is to find the optimal balance between diversification and simplicity.
What is the difference between asset allocation and diversification?
Diversification consists of spreading investments across multiple securities to reduce specific risk. Asset allocation goes further by determining the strategic split between different asset classes (equities, bonds, commodities…). It is asset allocation that determines approximately 90% of a portfolio's long-term performance and risk.
Are ETFs suitable during the capital withdrawal phase?
Absolutely. ETFs offer several advantages during the withdrawal phase: daily liquidity, low fees, transparency and ease of rebalancing. However, asset allocation becomes even more critical at this stage, as sequence of returns risk can compromise the sustainability of capital. This is why I favour the VPW method (Variable Percentage Withdrawal), which adapts the withdrawal rate each year based on age, portfolio allocation and actual results — far more personalised than the 4% rule, which at best constitutes a generic approximation.
Do you need to save a lot to build a diversified portfolio?
No. A savings rate of around 20% is entirely sufficient, combined with a coherent investment strategy maintained over time. The key is not to save as much as possible — extreme frugalism is counter-productive and difficult to sustain — but to deploy what you save into an asset allocation suited to your profile and time horizon. In less than 20 years, this discipline is sufficient to achieve financial independence for the vast majority of investors.
What's next in the series
The next article in this series is dedicated to an in-depth analysis of ETFs. Even if you prefer direct investment in equities, bonds, gold or real estate, understanding these instruments remains relevant. The majority of ETFs replicate indices and thus represent different asset classes — making them valuable tools for structuring an investment portfolio, whether or not you choose to include them in your final strategy.
Sources and data
- Statista — Worldwide ETF Assets Under Management
- EY Global — ETF Trends 2025
- Tidal Financial Group — 2024 ETF Year in Review
- PwC — ETFs 2029: The Path to $30 Trillion
- State Street Global Advisors — Why ETF Growth is Booming
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