Asset allocation is an integral factor of investment strategy in which it allows to create a balance between risk and reward, by diversifying a portfolio’s assets according to an individual's goals, extent of risk tolerance, and investment horizon. It also describes a strategy for allocating investment in different categories, such as equities, cash, bonds and real estate. Asset allocation refers to the division of money between a combination of shares, fixed income, and cash equivalents.
Constructing an Investment Portfolio is all about selecting dimensions of investments that are targeted at achieving specific goals and objectives with a level of risk involved. The key elements of asset allocation followed by the specific investment selection are as follows:
1. Evaluate your current financial objective:
Firstly, in order to set up an impressive asset allocation strategy, you need to analyze your goals and ongoing situation concerning how much time you have set for yourself to reach a particular objective, as planning for the future is the most important factor to understand the clear situation of an investor. This aspect involves taking into account short term assets, liabilities, cash flows, and investments. In developing an investment strategy ethics and preferences of the investor should be discussed. Investment objectives can be placed into 3 categories, i.e.
• Capital growth
• Balanced (a combination of both)
2. Determine your risk attitude:
It is important to understand factors that can decide how much risk you can accept and how many investment portfolios are needed in a short-term strategy to help you achieve long term goals. Risk attitude revolves around 4 main factors, which are as follow.
• Time to invest
• Overall assets base
• Income stability
3. Decide asset allocation:
History has shown that asset allocation is an important feature to oppose a specific investment selection that produces a majority of returns. Profit and loss allow investors to develop asset allocation in a way as to achieve an optimum diversification of targeted results. For various types of assets, including bonds, stocks and cash, an investor can set an interest rate to determine their asset allocation. An assets allocation strategy therefore describes the current situation and goals of the investor and are adjusted as a life change arises.
4. Selecting investing options:
Once the process of asset allocation is done, the next step is to move on with a specific investment opportunity or option which can be either done independently or you can select a mutual fund where fund manager completes a diversification process for you. The leverage of the manager is to have an easy and quick access to various investment markets around the world. Individual investment is based on the parameters of asset allocation. It includes investor’s preference for active and passive management.
5. Rebalance strategically:
After deciding and implementing on strategic portfolio, the process of management begins which needs to be monitored and rebalanced on the basis of portfolio performance. This act should be to check a balance at regular intervals i.e. quarterly, annually or bi-annually. The portfolio can be rebalanced if the target is not on track. When investing in long time goals, the process of portfolio planning never ends. Investors can make many modifications in their life, due to factors such as employment, time change, risk and reward which requires an adjustment to their goal.
6. Make an investment:
Now it is time to invest in the portfolio after collecting and inspecting the data and acting accordingly. Depending on how much you have decided to invest initially you can accumulate your regular savings. Investments, therefore, have a vast number of benefits if done in a manner to reduce volatility.