In terms of creating and balancing an investment portfolio, allocating assets is very necessary, with this done appropriately, it boosts overall returns generally. Your asset mix needs to reflect your goals at every point in time. Establish an appropriate asset with a mixture of; cash, bonds, stocks, and real estate.
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Stocks have always had the greatest risk and returns among the other asset categories listed. Stocks are very volatile and that makes them very risky especially when it is on a short-term basis.
Bonds, on the other hand, are generally less volatile but they offer a more modest return. Some categories of bonds offer a much higher return that is similar to stocks, but some bonds like junk bonds or high-yield bonds also carry very high risk.
Cash and other cash equivalents like saving deposits, treasury bills, money market funds, and certificates of deposit are often the safest forms of investment, but they offer the lowest return of the categories.
Financial advisors usually urge that, to reduce the level of portfolio volatility, investors need to diversify their investments into different types of asset classes.
As an individual, you will allocate your assets by dividing your investment portfolio between different assets, the goal is to minimize investment risks. The classification of assets is into three categories; equity, fixed income, cash, and equivalents, any other thing that is outside these categories is described as alternative assets.
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When trying to make investment decisions, the portfolio of an investor needs to be influenced by factors like; levels of risk tolerance, personal goal, and investment horizon.
Personal goal: These are individual aspirations given (often personalized) to achieve a level of return or to save for a reason. Different goals therefore affect the investment and risk level of an individual.
Time horizon: This depends on the duration an investor will take to invest. Most times, this is dependent on the goal of the investment, and in the same light, different time horizons come with different levels of tolerance to risk.
Tolerance to risk: This describes how an individual is willing and can lose a specific original amount of their investment with the hope of getting a higher return in the future.
Allocation of assets alone is not enough for risk management, placing all your assets in one place is not enough for security and it will not offer a lot of protection. Financial experts always advise diversification amongst other things.
Investment comes with associated rewards but also has its own risk, it would be a complete deceit to think there is any form of investment without its own risk as all forms of investment involve its own risk.
Below, are different strategies that will help with the allocation of assets, they include;
Strategically allocating assets: This helps to establish and adhere to a base policy mix.
Weighing asset allocation: This is a buy-and-hold strategy.
Tactically allocating assets: Short-term tactical and strategic deviations are important as over the long run, the usual strategic asset allocation may just seem relatively rigid.
Dynamic allocation of assets: This is another strategy of asset allocation that is active, with this, the rise and fall of the mix of assets are greatly considered.