What is Asset Allocation?
It’s an investment strategy that aims to balance risk and reward by apportioning portfolio's assets according to an individual's goals, risk tolerance and investment horizon.
Asset allocation is the process of developing a customized, diversified investment portfolio by strategically mixing different asset classes in varying proportions.
Asset allocation therefore aims to reduce the “ups and downs” associated with investing and makes it easier to stick with investors' long term investment objectives and avoid market timing. Ultimately, the objective of a good asset allocation plan is to develop an investment portfolio that will help you reach your financial objectives with the degree of risk you find comfortable.
Types of Asset Classes
1. Money Market Instruments/Cash
These are short-term investments which offer easy access to your money and provide stability of principal.
2. Equities
Equity provides the opportunity for higher growth over the long-term. But this greater potential reward carries a greater risk, particularly in the short-term.
3. Fixed Income
Fixed Income or bonds generally provide regular income and less volatility than stocks, and can act as a cushion against the unpredictable ups and downs of the stock market. Often, bonds do not move in the same direction as stocks.
Other alternative assets that may be considered include, Gold, Commodities, Real Estate Funds (REITs), Private Equity Investments etc.
How to get started?
Your money is too important to invest without a strategy. That's why it's critical to analyze your goals and your current situation before you make your investment decision. You should consider an asset allocation strategy based on:
- Time Horizon
It is the expected period for which you will be investing to achieve a particular financial goal. An investor with a longer time horizon may feel more comfortable making riskier investments.
- Risk Tolerance
Risk tolerance is your ability and willingness to lose some of your original investment in exchange for greater potential returns.
- Risk versus Reward
When it comes to investing, risk and reward are inextricably entwined. You've probably heard the phrase "no pain, no gain" – those words come close to summing up the relationship between risk and reward. Don't let anyone tell you otherwise: All investments involve some degree of risk. The reward for taking on risk is the potential for a greater investment return.
Watch out this space for more, next we will cover “Why Asset Allocation is so important?”
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