Asset allocation is the implementation of an investment strategy that attempts to balance risk versus reward by adjusting the percentage of each asset in an investment portfolio according to the investor's risk tolerance, goals and investment time frame.
To lower risk, minimize volatility and maximize returns, investors often use a financial technique called asset allocation. This strategy is used primarily to spread investment dollars over several assets/asset categories.
Asset allocation technique can be best defined as a diversification strategy which ensures that all assets in your portfolio don’t respond to the same forces of the market in the same manner and at the same time. So if one market performs poorly and the other performs well, you will be able to offset losses with gains, thus minimizing the overall impact or effect on your asset portfolio.
This depends on several factors. However, the most important ones are:
A simple asset allocation portfolio may include 2 to 3 investment categories. The 3 main asset categories may include: equities, cash and fixed-income. As they all behave differently, it is easier to balance out risks and returns. On the other hand, a more complex asset portfolio may include 6 to 7 asset categories.
When creating your asset allocation portfolio, keep ‘balance diversification’ in consideration. This helps lower risk and improves portfolio returns.
Asset allocation can be divided into three types: tactical, constant weighting and dynamic.
To create a high yielding portfolio, it’s best to work with an experienced portfolio investment manager who can guide you and help implement the right strategies at the right time. By diversifying your portfolio smartly across categories like cash, bonds, real estate, commodities, shares and private equity, you can easily maximize your potential for compound returns.
Financial education is so important, but barely taught at all in our schools. Having resources online is great, but not if they are inaccessible to so many. Thanks 508!