5 Things to Know About Asset Allocation

First of all, we must know what asset allocation is. It is an investment portfolio technique which helps in diversification by investing in different asset classes such as cash, bonds, stocks etc. thus ensuring to balance risk in case one asset class increases while other decreases.

Five things which are important in relation to asset allocation are as follows:-

1) Risk vs. Return

Every investor must take into aspect the concept of risk-return trade-off which basically means that potential return increases with an increase in risk. According to this risk-return trade-off principle, invested money can give higher profits, only if the investor is willing to accept that losses too can happen and they are a part of the market.

2) Don’t Rely Solely on Financial Software or Planner Sheets

Though the financial planning software and survey sheets designed by financial advisors can be beneficial, one must not rely solely on that as some of these worksheets are based on a set of simple questions that don’t match with every individual financial goal. Also, some of the surveys don’t take into account other important information such as whether or not you are a parent, retiree, spouse etc. So investors must be extra cautious and must do thorough research before relying on any such surveys and software.

3) Determine Your Long and Short Term Goals

An asset allocation plan must be prepared considering both the long term and short term goals of an investor in mind. It must thus be prepared according to the investors’ age, his/her risk-taking ability and thus every investor long and short-term goal plan will be different and must be taken into account.

4) Time is Your Best Friend

It is always said that investing early helps you take advantage of time value of money and compounding. Hence, it is advised by the financial planners to invest for long-term whether in mutual funds or direct in stock markets as in long run one will definitely higher returns.

5) Keep a Check on Your Portfolio

Once you have determined the right mix of stocks, bonds, and other investments, then it is the time to implement it. One needs to know what all is included in your current portfolio and you must keep a check on it and must remain in touch with your financial planner so that you can let him know what changes you need to make in your portfolio from time to time according to the conditions in the market.