Before we dwell into knowing the things to know about Asset Allocation first know what it means?
Since each individual has different wealth at his disposal and therefore the goals, risk tolerance. His investment horizon also differs and therefore for such a goal, asset allocation is an important component of investing. Even in modern times a lot of investors are not aware of how asset allocation plays a really important role in wealth creation. Asset allocation as the name suggests simply means to choose from a vast pool of Stock, Bonds and mutual funds. Further picking them based on your goals and risk tolerance factor. Not doing this allocation correctly would simply lead to undermining the ability to build wealth.
There is no simple formula to find the best allocation of assets for an individual. But there are a few points which you can note while doing it in order to help creating a plan for asset allocation:
Simply choosing a stock based on the highest return is not the answer for an investor. Therefore you should consider the risk factor in investment decision. Yes there are more instances that investors with high risk tolerance are able to yield more. But that won’t be in the same in a bear market, therefore exposure is necessary for all the avenues.
Don’t rely totally on financial planners or software’s:
The professional investors create smart financial planners and software’s in order for good returns but one shouldn’t rely 100% on them. Since each investors age is different. Therefore accordingly he should invest like a person with 35 years of age should invest 65% in stocks and 35% in bonds; fixed deposit etc. The age shift would determine the change in investment percentage as well.
Focus on your goals:
Determine the future of your goals and then plan your investments accordingly. That is if you are a student you don’t have to worry about short term goals. You can invest more amounts but if you are a father of a child then you can’t invest much. Since there are expenses which you have yield so planning as per your goals is necessary.
One should plan for his retirement by saving from the correct time or it would make it tougher if not done from the right time. Making use of compounding and the time value of money is important to plan goals for future.
There’s no better time to invest, but now:
Majority of the people are in a dilemma as to when to start investing in stocks or wait for the market to boom and invest at that time. At times it’s better not to enter the market when it’s not viable. Although there’s no better time to invest but now and therefore categorizing the portfolio. According to your needs is important and should take the step of initiation.