On a volatile global stage, asset allocation is an essential decision that investors will make on their journey of investing and growing their wealth. Asset allocation is a fundamental tool that aims to balance risk and reward by apportioning a portfolio’s asset classes according to an individual’s goals, risk tolerance, and investment horizon for long-term financial success.
Broadly speaking, the asset classes fall into three broad categories: stocks, bonds and cash equivalents. Anything outside these three categories (property, commodities, digital assets, etc.) is often referred to as alternative assets. There is no one size fits all solution or strategy that can find the right asset allocation for each investor.
Different asset classes have varying levels of risk and return potential. Proper asset allocation helps manage risk by spreading investments across diverse assets. You can mitigate the impact of poor performance in one asset class on their overall portfolio. Allocating assets strategically can potentially enhance returns by capturing the growth opportunities of different asset classes.
Different asset classes have different levels of liquidity. Asset allocation ensure you have the right balance of liquid and illiquid investments to meet your short-term and long-term financial needs.
Different types of investors may use different types of asset allocations for different objectives. Someone who is saving up for his or her retirement that may be decades to come will usually invest mostly in stocks, since he or she has more time to recover from market corrections. Someone who is saving up for a brand-new car in the coming year, would probably invest in a conservative mix of cash, certificates of deposit (CDs) and short-term bonds.
Risk tolerance plays an important role here because investors who are uncomfortable with investing in stocks may allocate their funds in a more conservative allocation despite having a long-term investing timeline.
Asset allocation isn’t a one-time event. The process allows for adjustments based on changing economic and market conditions. Rebalancing your portfolio periodically helps you stay aligned with your initial asset allocation goals. Overall, finding the right fit for investors would provide them with an ease of mind that their portfolio will grow steadily over time and beat the cost of inflation.
