Asset allocation is an investment method which attempts to balance risk versus reward, by adjusting the percentage of each asset in an investment portfolio according to the investor’s risk tolerance, goals and investment time frame.
The focus is on the characteristics of the overall portfolio, instead of individual assets. A way to implement asset allocation, is by constructing a portfolio of lowly and negatively correlated assets. Funds are then invested in various types of assets so that the investor achieves risk reduction through diversification, while also reaching his financial goals. The portfolio can consist of domestic shares, international shares, property, collectibles, as well as other assets.
The objectives of asset allocation includes:
It helps to reduce the fear of the investor
The investor would worry less if the stock market takes a big plunge in a single day. This is because they do not have all of their money in 1 or 2 stocks, and their assets are invested according to a strategic long-term plan.
It helps investors look at the overview of the market
Instead of isolating and focusing on a handful of investments, asset allocation “forces” the investor to look at the correlation between the different asset classes. A strategic mixture of investments may offer a portfolio, for which the value of the whole is greater than the sum of its parts.
It helps investors maintain confidence in their investment positions
Asset allocation reduces risk through diversification and structures portfolios such that they perform well in different economic climates.
The purpose of asset allocation is important, as most investors want to ensure that they are safely progressing toward their financial goals. Investors should aim to avoid suffering sharp losses in their portfolio over prolonged periods of time, and the strategic asset allocation can be used to prevent this.
If you need advice on asset allocation, do contact your trusted FLA Organization Financial Planner for consultation today.
