Asset allocation is a powerful investment strategy that balances risk verses reword by using diversification.
In other words: “Don’t put all of your eggs in one basket!”
Here is a practical way of thinking about allocation of assets.
Have you ever noticed that street vendors frequently carry unrelated items? For example, a street vendor may carry sunglasses and umbrellas. On sunny days he is able to sell sun glasses. On rainy days he is able to sell umbrellas. Rarely are the two sold at the same time. However, he is able to make money in either type of weather.
The same mentality is used in diversifying a portfolio. Having assets in a wide array of sound financial products (in normal economic conditions) tend to do better than having concentrated investments in only a few types of asset categories.
The principle of asset allocation is that different assets perform differently in different market and economic conditions. Market conditions are constantly changing. A sound asset allocation strategy is designed to reduce risk and improve overall investment returns.
Allocation of Assets Considerations
• Time horizon
How many months or years will a person be investing for? A longer time horizon may allow a person to take a riskier (but may produce more gains).
• Risk verses Reward Tolerance
Highly volatile, but potentially profitable investments may work for those with a high risk tolerance. However, those who can’t handle the high volatility should stick to investments that are more stable (but may not increase in value as much).
It is important to understand the concept of asset allocation. Equally important is that this philosophy does not work in all circumstances. Let’s explore further.
Does Allocation of Assets always work?
Allocation of assets is a powerful tool when applying
in a normal growth economy. Having several different financial instruments such as cash, stocks, bonds, mutual funds, CDs, real estate, precious metals and more may make sense—as long as they are properly allocated.
Professionals can help you determine the mix.
However, in an environment where
is required because of unstable economic conditions then standard allocation of assets may not be the best course of action.
In an unstable economy a strong bias may be needed towards hard assets such as precious metals (
gold and silver
), real estate and other assets that are outside the currency system.
Used in the right circumstances proper allocation of assets can be helpful in achieving financial goals.
Whenever investing, consider economic conditions, personal investment objectives, your risk verses reward tolerance, and an overall financial strategy spiced with good old
These are all important for making wise financial decisions.
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