The way a person divides his or her assets among investment categories is referred to as asset allocation. A well-planned construction of asset allocation helps a person to be able to increase in their return and this means that the portfolio volatility lowers. The three categories of asset classes include equities fixed income cash and equivalent. Classes that are not within the three classes of assets are referred to as alternative assets or real estate commodities or at. Some of the factors that a person can be influenced by in dividing his or her asset are personal goals level of risk tolerance and Investment Horizon.
Some of the factors to consider when considering asset allocation have been highlighted below.
One of the factors that you need to consider when considering asset allocation is age. It is important to consider age because you’re able to see what the extent of risky assets that you can get into your portfolio. aged people should consider going for lower-risk investments while young they can try a large percentage. Being young helps a person to be able to recover assets if there are any setbacks because they have more opportunities and time. Therefore for the aged people, they are recommended to plan their asset allocation so that they are able to preserve their principal amount.
Risk tolerance is another factor that you need to consider when considering asset allocation. Risk tolerance is referred to as how much a person will be willing to lose a given amount of the original investment in anticipation of getting a higher return in the future. A way that a person can get a higher return is in investing aggressively in assets when valuations are low. To be a successful value investor it is important to consider investing when the risk is not in your favor this is because you won’t be risking a large amount of your principal amount.
Another factor that you need to consider when considering asset allocation is diversification. It is important to note that when you divide your assets among different investment vehicles is referred to as diversification. It is important to note that through diversification you’re able to lower your risk.
Another factor for asset allocation knowing your goals. When a person knows their goals they are able to make a decision in asset allocation and cautiously be able to invest constructively. This is because you’re able to analyze their portfolio before allocating funds. Analysis of the portfolio helps to lower investment risk reduce dependency on single asset class protect during turbulent timing and helps in making timing the markets irrelevance.