Asset Allocation

One of the most important investment decisions you can make is not what particular stocks or securities you buy but how you allocate your investable funds to the various asset classes.

The principal is based on how you can use it as an investment strategy. It consist of many ideas. Some common one are (1) Risk and Return (2) Diversification (3) Time Horizon (4) Various Asset classes.

Asset Allocation is a method of deciding what percentage (%) of your available investable fund should be invested in cash, bonds and shares. Most common mistake among people is that they invest in familiar asset while ignore the others i.e. they do not diversify their financial assets sufficiently. Studies have shown that what really makes a difference to a portfolio's return and risk is not which shares or bond were chosen but how much was invested in shares and how much in bonds. That is to say, the asset allocation decision is the main deciding factor determining a portfolio's return and risk and can be much more important than the selection of individual securities.

Generally you can follow 5 steps in doing your asset allocation. They are:

Step 1. Decides on your investment Goals in areas of capital preservation, capital growth, income or liquidity. Then consider their importance.

Step 2. Decides on your Investment time horizon. It is connected to your investment goal. This time horizon is to define the time you need your fund back like an education fund for children, savings for retirement and other time for your financial need. With the "time" that you need the funds, you then can do-up the appropriate allocation putting a certain percentage of your fund to shares and bonds. With more time, you can go into higher risk asset.

Step 3. Consider your risk tolerance. That is to say, how much can you see the value of your investment fluctuate or prepared for the possibility of losses. Risk Tolerance is subjective and it varies from one individual to another.

Step 4. Decides a suitable asset mix which you are comfortable after considering the Risk and Return of each asset class. Also you must determine how they are correlated to each other.

Step 5. When invest in asset abroad, you must also consider the currencies fluctuate

You need to consider these 5 steps to arrive at an asset allocation that address your investment objectives and risk tolerance. An asset allocation suitable for one investor may not be suitable to another like-

Example : An investor's age is often the natural starting point in developing asset allocation guidelines. Investors in their 20s can afford more risk and thus can hold high percentage of stocks and smaller percentage of bonds and cash. While an investor in 50s tend to be more risk averse as they are approaching retirement and they now hold a higher percentage of bonds and cash than stocks.

After deciding your asset allocation, like all plans, you need to periodically review as financial circumstances will change. For example, you may make career-switch. Even if there is no change in your personal position, the market are likely to. Thus you must decides whether to keep to your existing allocations or rebalance them.

In conclusion, asset allocation is one of the most important investment decision. To do it well, you need to get assistance with your Independent financial adviser and then define your investment goals, time horizon and risk tolerance. The asset mix will have a diversified portfolio that address your investment goal and which can weather different market conditions.