The Importance of Asset Allocation: Tips to Succeed in the Market
A smart investor will always have a strategy for success. If you want your investment portfolio to achieve long-term success then it is important to know how to allocate your investments across different types of assets.
What is Asset Allocation?
Asset allocation provides an investor a diverse portfolio which in turn helps in minimizing the risks. An investor can also use the full potential of a particular asset class through the help of proper asset allocation.
However, before you can allocate your assets you first need to know your investor personality. For example, an older investor may allocate more funds to safer assets such as cash, while younger investors may prefer higher risk assets such as stocks
Is This Important?
Various asset classes respond to changing economic and market movements in different ways. Having an appropriate allocation of assets will help you weather these fluctuations and still turn a profit over the long run.
Take a sample investment portfolio (e.g. Portfolio A) with a larger allocation of cash (e.g. 80%) than shares (e.g. 20%). This portfolio will perform better in bad market conditions, as opposed to a portfolio with more allocations to shares. However, it will also perform poorly during good market conditions, “a bull run” as shares would have turned a much better profit.
What’s the Right Allocation for You?
There is no right or wrong answer as the right allocation of assets depends on:
- Your attitude toward risk and uncertainty – Are you averse to shorter term losses?
- Your investment time horizon – How long do you intend to invest your money for?
- Your individual circumstances – Do you have many other financial commitments?
The lower your risk appetite, the less you should put in risky assets. That will give you some peace of mind!
How Does Age Affect All This?
As you grow older, your allocation of assets should change towards more conservative assets like bonds and cash instead of higher risk shares. This is because it is important to have enough income generating assets to replace your loss of income after retirement.
Some example investment portfolios
You want to learn more about investing in general? Check our article 101 on investing.