What Is Asset Allocation?
Asset allocation (AA) is an investment strategy that calls for putting your money into a variety of diverse asset classes. The idea behind diversification is to invest in uncorrelated assets that do not move in tandem. In theory, when one investment does poorly or lags behind, other holdings will do better to offset those losses.
You never have too much of your money invested in any one area. You also rebalance your investment portfolio on a regular schedule to keep your allocation in line with your objective. That way you reduce the overall risk in your portfolio while maximizing your potential for gains. The opposite of diversification is concentration, or investing the majority of your money into just a few investments.
Does Asset Allocation Work?
Asset allocation is not a perfect investment strategy and there are some valid arguments against it. It is true that it probably will not make you rich quickly. Asset allocation is a more conservative way of managing your money. It can help you build wealth over time once properly understood and implemented.
If you want a comfortable retirement then you should probably learn about it. Maybe you have a 401(k) at your job or a personal IRA. In that case, you should definitely learn about the basics of AA.
Which Portfolio Should You Choose?
One of the most challenging aspects of implementing asset allocation is figuring out which allocation is right for you. Choosing the correct percentages based on your age is more an art than an exact science. It does help to understand what general mix you should choose based on your age.
Consider your own tolerance for risk when deciding on the right asset blend. Keep in mind that it is important to be able to withstand stock market corrections over the short and intermediate-term. You want to be able to sleep at night!
Moderately Aggressive Asset Allocation Portfolio
Most typical portfolios use three to six asset classes. A simple portfolio might consist of 65% stocks, 15% bonds, 5% cash, 5% alternative investments, 5% commodities, and 5% Real Estate Investment Trusts (REITs.) This type of allocation is appropriate for a person with a longer-term investment time horizon.
Which Investments Should You Pick?
Now you know the basics of building a properly diversified portfolio using the principles of AA. Which investments should you use? I would recommend using low-fee index Exchange Traded Funds (ETFs). These types of ETFs track indices and usually have very low management fees. They are suitable for core investments. You should also do your own research and find the right ETFs to fit your portfolio.
If you have a 401(k) at your job, then your options may be limited. Your 401(k) administrator will offer a list of products from which to choose.Some companies have a wide variety of investments; others offer a more narrow selection. Your will probably have enough options in your 401(k) to construct a basic portfolio using asset allocation principles.
Learn More About Asset Allocation
Asset allocation is a good way to build wealth over the long-term. It should play an important part in your overall investment strategy. Head over to Gator Finance to learn more. With just a bit of study you will be able to understand and implement the right asset allocation for your investment portfolios.