The way a person divides his or her assets among investment categories is referred to as asset allocation. Well, division of asset allocation helps to lower portal portfolio volatility and you are able to get an increase in your return. It is important to note that there are three different classes of assets which include equities fixed income per 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. The factors that can influence a person in the construction of an asset allocation include personal goals level of risk tolerance and investment horizon.
Some of the factors to consider when considering asset allocation have been highlighted below.
It is important to consider age when considering asset allocation. Considering age is essential because you can consider the percentage of your portfolio in risky assets. One is advised that if they are young they can consider the allocation of a large percentage to risky assets while if they are older to consider the lower percentage to risky assets. Being young helps a person to be able to recover assets if there are any setbacks because they have more opportunities and time. For the aged person to be able to preserve the principal amounts they are recommended to plant their asset allocation conservatively.
Risk tolerance is another factor that you need to consider when considering asset allocation. Risk tolerance is whereby an individual is willing to losing a certain amount so that they are able to get a higher return in the future. It is important to be aggressive in investing when valuation is low so that you can avoid losing your principal amount. 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.
When considering asset allocation it is important to consider diversification. Diversification is where you divide assets into two different investment vehicles. In different investment vehicles, one is able to lower their risk through diversification.
Knowing your goals is another factor that you need to consider when considering asset allocation. When a person knows there goes their ability to make a deliberate the rescission in asset allocation. It is important to get to know your goals and Vision because it will help you to analyze the portfolio and allocate the funds further. Lowering investment risk-reducing dependency on single asset class protecting during turbulent timing and helping in making timing the markets irrelevant are some of the benefits of analysis of effective asset allocation.