Which factors should guide a basic asset allocation?

• A. Risk tolerance, investment horizon, liquidity, and tax considerations.
• B. Past performance only.
• C. Market timing.
• D. Celebrity endorsements.

Answer: (B)

The main idea is that basic asset allocation should be guided by your personal constraints—risk tolerance, investment horizon, liquidity needs, and tax considerations. Risk tolerance shapes how much volatility you’re comfortable with in your portfolio, while your time horizon determines how long you can withstand drawdowns in pursuit of growth. If you’ll need funds soon or expect to need liquidity, that pushes you toward more accessible, less volatile assets. Tax considerations affect the after‑tax return of different investments and may influence how you place assets in tax-advantaged accounts. Together, these factors help you mix across asset classes to achieve a balance of growth and risk that fits your situation, and you’ll typically rebalance as those constraints change.

Past performance is not a reliable guide for setting allocations, because it doesn’t predict future returns. Market timing—trying to enter or exit assets to beat the market—often leads to worse long-term results and isn’t a sound basis for allocation decisions. Celebrity endorsements don’t reflect risk, return, or costs and aren’t relevant to prudent asset planning.