Asset allocation: the key to a successful portfolio. Do you pay attention to yours?



What does your portfolio asset allocation look like? Did you intentionally invest based on asset allocation?

Contributor – MarketBeat

If not, that’s understandable. Most people don’t think about how they allocate their investments when they start investing. They can try one investment and then invest in something else, thinking, “Why not add this to the mix? ”

But if you do that, do you really have a good balance? How do you know this and how do you make sure your investments are allocated correctly? Let’s find out.

What is asset allocation?

Simply put, asset allocation refers to the implementation of specific techniques to balance risks in a portfolio. You can divide assets into categories, such as bonds, stocks, and real estate. Each type of investment “behaves” differently, so any decline in one asset can be overcome by the success of another asset. It can protect you from loss and can be one of the most important decisions you can make about your investments.

How to efficiently allocate your investments

You know that asset allocation is important, but how do you implement it in your portfolio? Let’s go through the steps.

Step 1: Set Specific Goals.

Everyone invests with a goal in mind. You might not articulate it, but in the back of your mind you might say, “I’m going to invest in X because it’s a retirement nest egg.

Make a list of goals to understand exactly why you are saving. You may have the following in mind:

  • Saving for retirement
  • Plan a world tour
  • Put money into an emergency fund
  • Put money in an account for the university
  • Save for a down payment on a house
  • Pay off the mortgage
  • Take a mini retreat
  • Renovate the basement or the kitchen
  • Start up the seed capital of a business
  • Planning a divorce

What other goals do you have on your list besides these? The more precisely you define your objectives, the better you will be able to allocate your assets.

You can include short and long term goals in your plan depending on your current life situation. Note that it doesn’t matter if your plan changes as your life evolves. You can adapt as your life changes – you could experience business bankruptcy or cancer. Your investment portfolio should reflect your current situation and look to the future.

Step 2: Identify your risk profile.

What is your risk profile? If you are unsure, you probably already know on some level. Just ask yourself this question: How reluctant do you feel about losing money in general?

What is your instinct on this question?

Once you have answered this question, you can begin to piece together your investor profile and your ideal investment approach. Are you more comfortable with any of the following?

  • Avoidance of losses: Want to protect your money at all costs? A capital preservation approach means you want to preserve the money you have in your wallet and take little additional risk. If this is your position, it is important to remember that some investments offer limited growth opportunities – they are low risk, low return investments.
  • Medium risk: If you have a little more risk appetite, you can look for an asset allocation that represents a medium level of risk, including the potential for moderate capital losses. This type of allocation could earn you regular interest and dividend income.
  • Growth: As you can imagine, the latter profile involves a growth mindset, which accepts risk through instruments with a higher risk profile. The more risk you take, the greater your potential for wealth accumulation. Long term growth should outweigh short term losses as they have the best chance of growing noticeably over time, but you can lose more money using this strategy as well.

Step 3: Choose the right strategy.

You want to choose the right strategy in order to achieve all of your financial goals, including short term and long term goals. Let’s take a look at several types of asset classes that you can use to implement your overall strategy:

  • Actions: Stock refers to the stock of a company that you plan to increase due to capital gains or the generation of capital dividends. You can add many types of stocks to your portfolio to diversify it. A share represents a participation in a company.
  • Fixed income: Fixed income includes investments in which the borrower or issuer has to make fixed payments according to a schedule predetermined for you, the investor. (Bonds are a good example of fixed income investments.)
  • Merchandise : Commodities refer to commodities used in trade, such as beef, eggs, sugar, corn, soy, etc.
  • Immovable: Real estate can add another dimension to your portfolio, including cash flow, tax breaks, yields, inflation hedging and more.

Are there other types of asset classes? You bet – including alternative asset classes. It is important to exercise good judgment as to which ones you choose and to ensure that you diversify not only between asset classes, but also within them. Understanding stocks, bonds, commodities and more can form the right strategy and the best returns for your particular risk appetite.

Step 4: Acknowledge your financial experience (or lack thereof).

How well do you know how to manage your own investments? Can you make informed decisions that reflect your risk tolerance and goals?

Otherwise, you need to hire a financial fiduciary advisor to help you. If you need someone to help you lay the foundation of the house, incorporate that help and allow the right person to advise you through all stages of your life. Through it all, make sure your advisor understands your overall goals and investment strategy and keeps you on track and informed, especially when market events arise that make your portfolio a bit more unpredictable.

Choose the right asset mix

What is the best asset allocation? The idea is simple, but not always the easiest to disentangle. Either way, the combination of your overall investment goals, risk tolerance and financial literacy will influence which asset mix and investment strategy is right for you.

Is it too late to adjust your allocation once you’ve already started investing?

You can always change your asset allocation, but remember not to do this just to react to market conditions. You can always update your goals and reassess your risk tolerance over the years. Get help doing this if needed.


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