A personal finance manager will tell you to start saving and investing as soon as you earn money. As a novice, you may face obstacles such as you don’t know where to invest and how much to invest. Your limited understanding of the financial markets leads you to invest in funds within similar categories, believing that they will perform well. Unfortunately, if the market is volatile, your funds may not perform well and you may lose money.  Allocating assets helps to solve this problem.

What is Asset Allocation?

Investing involves return, risk, and liquidity, and asset allocation is about balancing these three components. An asset allocation strategy involves investing in different asset classes such as equity, fixed income, cash, real estate, gold, etc., which helps mitigate the risk from one asset by investing in another asset class.

How does the Asset Allocation work?

Your investment portfolio will be diversified if you invest in different asset classes. In order to diversify effectively, you should plan so that different assets do not fall into the same bucket. Diversification would not be successful if that were the case. By having assets of different types, when one of them is not performing well, the other will perform well and cover the loss you may suffer.

Asset Allocation Strategy

Maximizing returns while minimizing risk is the main objective of asset allocation. The following factors should be considered when allocating assets:

• Time Horizon –

Within this period, whether months or years, you can expect to see returns and meet your goals. Different investment options have different returns over different time horizons. A long-term investment usually carries a high risk, but has the potential to deliver high returns.

• Risk Tolerance –

Risk Tolerance refers to your ability to accept potential losses on investments in anticipation of high returns.

• Risk and Return –

Taking risks and getting returns are mutually exclusive. High stakes/risks translate into high returns. The higher the risk, the better the return.

You can choose how you diversify your investment portfolios based on the above factors; there is no rule on how you must allocate your assets. If you own a mutual fund, you should also diversify there. Start investing in debt funds if your investments are heavily weighted toward equity funds. If you want a mix of equity and debt, then you can opt for hybrid funds. These funds will automatically create a mix between debt and equity at a certain percentage of your money, saving you the trouble of buying multiple funds.

Why should you rebalance?

You rebalance your portfolio by buying or selling assets in a particular category in order to get it back to its original asset allocation. Rebalancing ensures that you do not overexpose yourself to risky investments that will lead to losses.

Diversified portfolios with adequate asset allocation are always a good idea, which you must monitor on a regular basis. A diversified portfolio is created according to your goals, investment horizon, and risk tolerance. A financial advisor can provide you with guidance if you are unsure how to proceed with asset allocation.

Our financial planners will help you allocate assets and plan your financial future based on your current situation. Get in touch with us today.