Asset allocation is one of the most general portfolio management strategies. It can be simply defined as “Don’t put all your eggs in one basket.” If you are a beginner in investing, you should consider the following 6 things about asset allocation in order to achieve your financial goals through investing.
1) Asset allocation means that your investment portfolio includes different asset classes such as stocks, bonds, cash, funds, real estate, precious metals, foreign currencies, commodities, cryptocurrencies, etc. For a Beginner, investing in a portfolio including only stocks, bonds and cash can be a good investment strategy.
2) Success of asset allocation will largely depend on your time frame and risk tolerance. Your time frame is the expected number of months or years that you will invest to succeed a certain financial goal. After deciding your time frame, you should determine your risk tolerance which means that your ability and willingness to lose some or all of your initial investment in exchange for greater possible returns. Don’t forget that your time frame and risk tolerance will determine the asset classes that you will put into your portfolio.
3) In order to find the right asset allocation for your risk tolerance, you can get help from financial advisers or some online software packages.
4) Asset allocation will protect your portfolio depending on the developments in the markets because different asset classes, for example, bonds and stocks, give different reactions to the market developments. If one asset class’s investment return falls, you’ll be in a position to compensate your losses in that asset class with better investment returns in another asset class. It is called diversification, that is, “Don’t put all your eggs in one basket.”
5) Your asset allocation will probably need to be changed related to your age, events in your life, changes in your risk tolerance, changes in markets and economy, or other factors. Your current allocation may be not right after a few years. Thus you shouldn’t forget to change the allocation if it is necessary.
6) You should rebalance your portfolio in regular time intervals because by the time, some asset classes may grow faster than others and are out of alignment with your financial goal. By rebalancing (shifting money from well performing asset class to poor performing asset class), you’ll return your investment portfolio to a comfortable level of risk.