Asset Allocation: The Key to a Successful Portfolio. Are You Paying Attention to Yours?
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Asset Allocation
It refers to implementing specific techniques to balance risk in a portfolio. You might divide assets into categories, such as bonds, stocks and real estate.
Each type of investment "behaves" differently, so any downturns in one asset may be overcome by the success of another asset. It can protect you against loss and can remain one of the most important decisions you can make about your investments.
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Effectively Allocate Your Investments
- Set specific goals. The more specific you can be in outlining your exact goals, the better you can allocate your assets.
- Identify your risk profile. Just ask yourself this question: How squeamish do you feel about losing money in general?
- Choose the correct strategy. You want to choose the right strategy in order to achieve all of your financial goals ā including goals in the short term and in the long term.
- Acknowledge your financial experience (or lack thereof). Can you make sound decisions that reflect your risk tolerance and goals? If not, you need to hire a fiduciary financial advisor to help you.
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Investing Approaches
- Loss avoidance: A capital preservation approach means you want to preserve the money you have in your portfolio and take little extra risk. If this is your position, it's important to remember that certain investments offer limited growth opportunities ā they're low-risk, low-reward investments.
- Medium risk: If you have slightly more of an appetite for risk, you may look for an asset allocation that represents a medium amount of risk, including the potential for moderate capital losses. This type of allocation could net you regular income from interest and dividend earnings.
- Growth: A growth mindset is one that accepts risk through instruments with a higher risk profile. The more risk you assume, the greater your potential to accumulate wealth. Long-term growth should outweigh short-term losses because they have the best chance of appreciably growing over time, but you can also lose more money using this strategy as well.
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Types of Asset Classes
- Equities: Equities refer to shares of a company that you expect to rise due to capital gains or the generation of capital dividends. You can add many different types of equities to your portfolio to diversify it. A share of stock represents an equity interest in a company.
- Fixed income: Fixed income includes investments in which the borrower or issuer must make fixed payments on a predetermined schedule to you, the investor. (Bonds are a good example of fixed income investments.)
- Commodities: Commodities refer to basic goods used in commerce, such as beef, eggs, sugar, corn, soybeans and more.
- Real estate: Real estate can offer another dimension to your portfolio, including cash flow, tax breaks, returns, an inflation hedge and more.
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