Ever encountered the word Asset Allocation? Well, if you’ve been in the financial world, there is big chance that you stumbled once or twice with this word. What Asset Allocation is, in short-term, an investment portfolio that divides your assets into major categories. The main use and purpose of Asset Allocation are to balance investment risks and create a diversification. The classifications of categories for your Asset Allocation are as follows; cash, bonds, stocks, real estate, and derivatives.
How Different Assets Work
Each asset classification has varying levels of return and risk, this means that individual assets will behave differently over a period of time. For example; some asset may increase in value but the other may be decreasing or not increasing as much as the other. Most critics call this phenomenon as “recipe for the mediocre return.” It is highly recommended to investors is to never miss a single investment class or sub-class so you can be protected against any major loss.
What are Risk and Return?
Risk and return are the words highly paired with asset allocation, as a matter of fact; they are the core of what asset allocation is all about. You will always hear a lot of people, investors, analysts, and everyone in the business world say the phrase “we want a high return” this is because return means the obvious, but the underlying ugly fact is that they simply choose the asset with the highest “potential” return. This isn’t the right way to do it, recent outcomes from 2007-2009 were successful on portraying why investing in stock with the high potential return is actually lethal.
Read also: Gauging Your Risk Tolerance
It will be very alluring to invest in stocks with “potential” high return but it isn’t really the best thing to do. But investors with higher risk tolerance can and would allocate more money into stocks. But if you are on the leaner part, it is best to cut your exposure to equities to avoid investing through the short-term fluctuations of the bear market.
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