Allocation — distribution of resources and production factors
What does allocation mean? The definition
Allocation, often referred to as resource allocation or factor allocation, describes the distribution of resources and production factors in a market economy. The focus is on limited resources such as labor, capital and land space. The aim is to use these scarce goods in such a way that market participants can produce their goods and services as cost-effectively and as resource-efficiently as possible. At the same time, imbalances should be avoided. In addition, the term is also often used to divide assets into various investments. Asset allocation is the distribution or allocation of your money across multiple asset classes, such as stocks, fixed-income securities, debt securities, cash, and real estate. The primary purpose of asset allocation is to reduce the risk associated with your investment.
The allocation problem
In an economy, energy, raw materials, machinery, capital, qualified workers and land are highly sought after but scarce resources. As market participants, individuals, companies, institutions, organizations and the state compete for these goods. In order to achieve maximum output with minimal effort, an optimal allocation of resources is necessary.
Allocation of resources according to the market mechanism
The market mechanism performs efficient allocation by regulating itself through supply and demand. Flexible and adaptable markets are a prerequisite for this. Rising energy prices, for example, are prompting market participants to use energy more sparingly and to review their production processes. The competition promotes technical progress and the adjustment of working conditions. However, the market mechanism does not prevent inequities and because it is never completely free, it does not prevent all imbalances. For example, unpriced costs, such as environmental pollution, can lead to market distortions.
Allocation of resources through government intervention
In contrast to the market mechanism, the state can intervene in resource allocation in order to provide support to economically disadvantaged market participants and to minimize inequalities. This is intended to ensure equal opportunities and is often done against the backdrop of political goals. However, government intervention can also impede market participants' own initiative. The instruments include funding, price fixing, production requirements and laws. For example, the state uses tax measures and a price cap to promote a fair market price.
Asset Allocation: A diversified allocation of resources
Asset allocation or asset distribution describes the strategic allocation of capital in order to achieve a high return and diversify risk. For market participants, it is an essential tool to operate independently of the capital market. The capital is distributed across various business areas, industries and maturities.
The impact of real estate on asset allocation
Real estate often has a low correlation with other asset classes, such as stocks or bonds. A stock market crash does not automatically mean that real estate also loses value. There is talk of a moderately positive correlation, which means that real estate tends to trend in a similar direction as stocks, but with less intensity. The correlation between real estate and bonds is typically lower than that with stocks and can even be negative. This makes real estate a valuable diversification tool in the portfolio. By adding real estate, the overall risk of the portfolio can be reduced without necessarily diminishing return expectations.
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